7 IN. DI LETTURA
(The following statement was released by the rating agency)
July 31 - Standard & Poor's Ratings Services said today that it has lowered the ratings on General Motors Corp., Ford Motor Co., and Chrysler LLC, all to 'B-' from 'B'. The ratings on GM and Ford were removed from CreditWatch with negative implications, where they had been placed on June 20, 2008. Chrysler will remain on CreditWatch pending the renewal of certain bank lines at DaimlerChrysler Financial Services Americas LLC (DCFS), which we expect to be completed in the next few days. If the bank lines are renewed as expected, we would affirm the ratings on Chrysler and DCFS and remove them from CreditWatch.
At the same time, we lowered the ratings on GMAC LLC, Ford Motor Credit Co., and DCFS, also to 'B-' from 'B', and removed the ratings on GMAC and Ford Credit from CreditWatch negative, where they had also been placed on June 20, 2008. The ratings on DCFS will remain on CreditWatch negative until its bank line renewal is complete. We also lowered the corporate credit rating on FCE Bank PLC, Ford Credit's European bank, to 'B' from 'B+'. The outlooks on all the companies are negative. (The issuer credit rating on GMAC's Residential Capital LLC mortgage unit [CCC+/Negative/C] is not affected by these rating actions.)
Standard & Poor's will hold a telephone conference call on Thursday, July 31, 2008, at 1:30 p.m. EDT to discuss the credit rating actions on GM, Ford, and Chrysler (see dial-in information below). The speakers on the call will be Standard & Poor's Chief Economist David Wyss, and Robert Schulz and Gregg Lemos Stein from Standard & Poor's U.S. Auto Ratings Team. After their initial remarks, the speakers will be available to answer questions.
The downgrades reflect mounting cash losses in GM's, Ford's, and Chrysler's North American automotive operations and deteriorating conditions in the U.S. auto market.
"We believe sharply lower U.S. light-vehicle demand and the recent dramatic shift in demand away from large pickup trucks and SUVs amid higher gas prices will complicate the turnaround efforts of all three automakers and reduce their currently adequate liquidity considerably over the next year and a half," said Standard & Poor's credit analyst Robert Schulz. "This will leave them more vulnerable to already adverse industry, economic, and credit market conditions." The greatest threats to the ratings over the next 18 months are the depth of economic weakness and the extent of the demand shift away from light trucks in the U.S.
We estimate GM will use as much as $16 billion from its global automotive operations this year, including cash restructuring costs and costs related to bankrupt former unit Delphi Corp. Of that amount, GM used $3.9 billion in the first quarter. We estimate Ford will burn as much as $12 billion to $13 billion from its global automotive operations this year, including cash restructuring costs. Of that amount, Ford used $4.9 billion in the first six months of 2008. Chrysler does not make its financial results public, but we expect the company to experience a net cash outflow from its automotive operations in 2008, its first full year since being acquired by Cerberus Capital Management L.P. Aggressive fixed-cost reduction and conservative industry sales assumptions have kept Chrysler at or above most of its financial targets through the first quarter and likely through the second quarter.
Liquidity for all three automakers is adequate for now, but will be significantly reduced in the second half of this year and during 2009 by continued heavy losses and cash outflows.
Industry sales, including those of pickups and SUVs, continue to weaken, which will likely lead to higher cash losses for all three automakers in the second half of the year. We expect U.S. light-vehicle sales to be 14.4 million units in 2008, the lowest in 15 years and down sharply from 16.1 million units in 2007. We expect sales to fall further in 2009, to about 14.1 million units, as the economy remains weak and housing prices and consumers' access to credit remain under pressure. We estimate that there is a 20% chance that auto sales in 2008 and 2009 will plummet to 13.6 million and 11.7 million units, respectively, which would present an overwhelming challenge for all three Michigan-based automakers.
Another major headwind has been plummeting prices for used SUVs and pickups, which is causing alarming losses on leasing activities and will lead Ford Credit to be unprofitable for 2008, even excluding a $2 billion charge booked in the second quarter. GM and GMAC will likely take impairment charges in the upcoming quarters.
There has been periodic speculation that the Michigan-based automakers might eventually seek to reorganize under Chapter 11 bankruptcy protection. Managements at all three companies have strongly denied any such intention and appear committed to executing on their turnaround plans. Few of the automakers' problems--including lower sales, adverse product mix shifts, and high commodity costs--would be altered by a bankruptcy filing. We believe the most likely trigger for a bankruptcy filing would be cash reserves falling to dangerously low levels, rather than the automaker's making a strategic choice to seek Chapter 11 reorganization.
The outlooks on each company and its financial unit reflect our expectation that liquidity at each automaker will be almost halved by cash losses in 2008 and 2009 but will not sink to dangerously low levels, even if industry conditions do not materially improve by the end of next year. We could revise the outlooks, or place the ratings on CreditWatch and subsequently lower them, if we came to believe that cash and short-term investments plus secured revolving credit facility availability would drop below certain levels before the end of 2009. This could occur if U.S. light-vehicle sales drop well below 14 million units this year and next, or if higher gas prices lead to an even more substantial decline in light-truck demand beyond current levels. We could also lower the rating on GM if GMAC loses access to the asset-backed securitization markets for any extended period.
We do not expect to revise the outlook to stable or raise the ratings within the next year, given the economic outlook, ongoing turnaround plan execution risk, and potential pressure on liquidity.