GM, Ford turnarounds hinge on economy: S&P
LONDON (Reuters) - Ford Motor Co. <F.N> and General Motors <GM.N> have
had some success in efforts to return their North American operations to
profitability but still face significant headwinds, Standard and Poor's
The strength of the U.S. economy remains the key wildcard to the
automakers' turnaround plans, S&P analysts Robert Schulz and Gregg Lemos
Stein said in a presentation on Friday in London.
"Current liquidity at both GM and Ford are fairly strong and management
are focused on restructuring," said Schulz.
But he said there was a risk of default in the event of a U.S. recession
which would make cost cut targets and revenue goals hard to achieve.
S&P is forecasting U.S. light vehicle sales at 16.3 million this year,
down slightly from 16.5 million in 2006.
But a sharper decline cannot be ruled out, with a possible 10 percent
decline in sales likely to have "severe complications for Ford and GM's
turnaround efforts," Schulz said.
For now that is not S&P's main scenario and analysts there say the U.S.
economy remains in reasonable shape. Near term risks, however, include
the willingness of United Auto Workers to agree to contractual changes
later this year.
S&P said neither side is likely to take a very hard line, with only a
small chance of a prolonged strike by workers which, if it did happen,
could cripple turnaround plans.
Ford and GM fell to "junk" status in 2005, and are currently rated B,
five notches below investment grade.
They face other problems including overcapacity and dwindling market
share in the U.S. light vehicle market as their commitment to cut
production comes at a time when Japanese rivals are ramping up theirs,
Triple-A-rated Toyota Motor Corp. <7203.T> is set this year to end GM's
76-year reign as the world's biggest automaker after the U.S. group last
week forecast global sales of 9.2 million vehicles against Toyota's plan
to move 9.34 million.
GM, which lost more than $10 billion in 2005 and about $2 billion in
2006, is in the middle of a restructuring that also includes slashing
more than 34,000 jobs and closing 12 plants. Earnings this year have so
far proved disappointing however.
GM reported a 90 percent plunge in first-quarter earnings earlier this
month, missing Wall Street estimates by a wide margin, as
mortgage-related losses at its GMAC affiliate swamped gains in its main
Ford, which made a record $12.6 billion loss last year, is lagging its
U.S. rival in terms of restructuring. But it has made sharp U.S.
production cuts and negotiated concessions on healthcare costs, S&P
Indeed five-year credit default swaps on both companies have been very
CDS on GM jumped to near 1,400 basis points in early 2006 but fell to
under 400 basis points earlier this year. CDS on Ford, meanwhile, has
ranged between 400 and 1,000 basis points over the past year or so,
according to JP Morgan data.
That, S&P says, reflects the uncertainty about how the companies will
S&P also said the current B ratings posed challenges for the companies
in the longer term, with a need for both to find ways to improve their
ratings and cut the costs of funding.