Royally Kranked

Sunday, October 09, 2005

This has not been the best of years for Detroit's Auto Industry

First, GM & Ford saw their Debt Ratings downgraded to "Junk" status

S&P cuts GM, Ford credit ratings to ‘junk’

"Standard & Poor's Thursday declared billions of dollars of debt owed by General Motors and Ford to be “junk” on Thursday, a significant blow that will increase borrowing costs and limit fund-raising options for the nation’s two biggest automakers......The numbers involved are enormous: GM paid about $12 billion in interest on debt last year and Ford’s tab totaled about $7.1 billion. GM’s consolidated debt as of March 31 was $291.8 billion and Ford’s totaled $161.3 billion, S&P said."


Standard and Poor's downgraded debt ratings for American automakers General Motors and Ford. The lowered credit rating, now at "junk bond" status, is expected to increase borrowing expenses......The stakes for both companies are high. More than 1.1 million Americans make a living off the auto industry, and GM and Ford have more than 45 percent of the American market between them.

Wall Street standing suffers

General Motors Corp. and Ford Motor Co. -- with combined 2004 sales of more than $365 billion -- became the biggest companies to have their credit rating downgraded to below investment grade -- or junk status -- by a major rating agency.

Q: Why were the credit ratings of GM and Ford reduced to speculative grade?

A: Standard & Poor's cited deteriorating SUV and pickup sales -- the two companies' most profitable models -- in addition to steady market share losses, lower U.S. sales, weak revenue growth, falling profits and significant obligations for retiree pension and health care coverage.

Q: What does the credit rating downgrade by Standard & Poor's mean for GM and Ford?

A: Credit ratings are assigned to debt issued by companies and reflect the borrower's ability to repay the debt. So in terms of symbolism for Detroit's two biggest automakers, it's a blow to their reputations and standing on Wall Street. Many investors expected the downgrade.

Q: What does the downgrade mean for GM and Ford shares?

A: Some institutional shareholders -- mutual funds -- and public pension funds are prohibited from investing in speculative securities with credit ratings below investment grade. Those restrictions make GM and Ford less attractive to more investors and could depress the shares over time.

Q: What is the long-term impact of the downgrade?

A: Investors demand higher yields buying debt that is considered riskier. So overtime, a junk rating will make it more expensive for GM and Ford to borrow the billions of dollars they need to fund development of new models. They will also have to pay higher interest rates on the bonds they sell. Last year, GM and its GMAC finance arm spent $11.9 billion on interest payments, up 26 percent from the year before. GM and Ford are already slashing costs where possible by closing some plants and cutting jobs.

Q: GM and Ford are the biggest issuers of corporate bonds in America. What does the downgrade mean for the bond market?

A: The downgrade could cause major disruptions in the junk bond market, partially because many funds that are limited to investment-grade assets will be forced to sell GM and Ford's bonds. The risk is already factored into the price of junk bonds since GM lowered its earnings forecast in mid-March.

Detroit's Woe, America's Worry

General Motors (GM ) shocked the financial world in mid-March when it warned of staggering losses in the first quarter of this year -- $1.1 billion in red ink when the number was announced on Apr. 19. Ford (F ) reported on Apr. 20 that it managed to post a profit of $1.2 billion in the period, but that was a punishing 38% drop from a year ago.

Both companies' stocks have fallen about 40% in the past year, and credit markets are reeling at the potential for credit-rating downgrades. "It's a very sad day here in Detroit," says Gerald Meyers, a professor at the University of Michigan Business School and former chairman of American Motors Corp. Even Chrysler, a division of Germany's DaimlerChrysler (DCX ) that's holding up far better than the other two members of Detroit's Big Three, is worried about what troubles at GM and Ford portend for the U.S. auto industry, says Meyers.

LOST IMPACT. Because of the domestic auto industry's size, its misfortunes have an amplified impact on the overall economy and on family budgets, say economists and industry experts. For example, financial turmoil sparked by a credit downgrade for the car companies could have a direct effect on many Americans' savings and retirement accounts. When debt falls in value, mutual funds and pension funds holding bonds issued by these carmakers fall, too. Rising gas prices only add to consumers' pocketbook misery.

And more search results here

It's worth noting here that the most profitable lines of the US auto industry, the larger vehicles like full size pickup trucks, humvees and SUV's are now starting to lose their luster as the price paid at the gas pumps keeps rising, while it looks like the smaller or more fuel efficient vehicles are experiencing an upsurge

The reason for the history lesson via GM & Ford is because another auto-related business is going through a very rough patch.

Delphi, the largest U.S. auto supplier, files for bankruptcy

Delphi's bankruptcy, which is expected to result in plant closures and layoffs, is one of the largest in U.S. history. The company has 50,000 U.S. employees.....Based in the Detroit suburb of Troy, Delphi has struggled to make a profit since GM spun it off in 1999. It lost $4.8 billion (?3.95 billion) in 2004 and nearly $750 million (?617.59 million) in the first half of this year."

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Auto Supplier Delphi Files for Bankruptcy

When G.M. spun off Delphi in 1999, the automaker agreed to pay health-care and pension benefits for Delphi retirees in the event of a bankruptcy filing within eight years......The company filed in Bankruptcy Court in Manhattan under Chapter 11 of federal bankruptcy regulations, which provides protection from creditors. Delphi, which employs close to 50,000 Americans and 185,000 people worldwide, has reported losses of $5.5 billion in the last six quarters, and its cash reserves are dwindling. With half of its business coming from G.M., its fortunes have waned along with those of its former parent, and Delphi’s executive suite has been largely purged in the wake of an accounting scandal. The company makes a range of auto parts, from air bags to instrument panels, that are installed in most new cars and trucks sold in the United States."

And of course, Delphi is asking it's employees to take the bullet via their pensions, even though those at the top had their contracts bought out at a very lucrative price

Auto Supplier Delphi Files for Bankruptcy

Delphi and GM have been tightlipped about the negotiations. But a letter sent from UAW leaders to union members in Kokomo, Ind., earlier this week said Delphi asked the UAW to accept wage cuts of more than 50 percent, to $10-$12 an hour, and eliminate the jobs bank. Delphi also called for a reduction in health care benefits and vacation time.

Delphi also has been plagued by an accounting scandal that the FBI and the SEC are now investigating. Six people have resigned because of the investigation, including Delphi's former Chief Financial Officer Alan Dawes.

More Search Results HERE

And now, add an uncomfortable reality to the above financial imbroglios, especially as Ford & GM are the biggest issuers of corporate bonds in the US.

So, with the recipe almost fully set, we need one more ingredient

And Voila,

China Holds Largest Amount Of US Debt

How Scary Is the Deficit?

The U.S. current account deficit -- the gap between what the United States earns abroad and what it spends abroad in a year -- is on track to reach seven percent of GDP in 2005. That figure is unprecedented for a major economy......Recent economic growth has not reduced the budget deficit, but it has increased private demand for scarce savings; the net result has been even more borrowing from abroad. In 2004, foreigners bought an amazing $900 billion in U.S. long-term bonds; the United States exported a dollar of debt for every dollar of goods it sold abroad. Looking ahead, the U.S. debt position will only get worse. As external debt grows, interest payments on the debt will rise. The current account deficit will continue to grow on the back of higher and higher payments on U.S. foreign debt even if the trade deficit stabilizes. That is why sustained trade deficits will set off the kind of explosive debt dynamics that lead to financial crises.....Foreign central banks have financed the United States to keep their export sectors -- heavily dependent on U.S. consumer spending -- humming. But they now must weigh the benefits of providing the United States with such "vendor financing" against the rising costs of keeping the current system going."


Like the aggressive home and car buyers of the 1920s, people of our time have believed it is safe to borrow aggressively to improve their lifestyles, particularly when their homes have risen in value. Higher debt levels in a falling interest rate environment often come with little or no increase in monthly mortgage payments......Consumer spending has shot up also. An important part of that money has circulated out of the US to China and Japan to pay for the imported goods that keep flowing into our country. Fortunately, our new bankers in the Far East also want to keep the big wheel turning, since from their point of view, all those exports to America create jobs back in China and in Japan. They also realise that the competitiveness of their goods in the global market might be endangered, if their currencies were to rise sharply against the dollar. So they have been investing their growing surpluses of dollars back into the US, usually buying Treasury Bonds. And this recycling operation has seemed like a virtuous cycle for the US economy. Strong foreign buying of bonds, have allowed Greenspan to keep both long and short term rates down. Confidence in the momentum of the economy has grown, even though actual job creation has remained anemic, weaker than is normal in a recovery coming out of recession......The net result of the action of Greenspan's money machine is that Debt has grown in the US, while China and Japan have accumulated massive holdings of US debt......By mid-2004, U.S. Household debt had risen to 86% of GNP, up from 64% just ten years earlier, and foreigners hold a majority of US treasury debt, up from almost insignificant amounts in 1994."

What this means is that China has a HELL of a cudgel to bash any US President with, either outright refusing to buy up any more US debt, or even just making a subtle threat, along the lines of "It sure would be a shame if we weren't able to purchase our usual amount of treasury bonds due to unfavorable economic & political realities

With all the problems currently tearing at the GOP on both the state and national levels, the reality of US dependence on the actions/machinations of the world's only other true superpower, China, is a trend that doesn't bode well for the Neocon groupthink about Permanent US Ascendancy & unchallenged political & military domination over the globe

With rising gas prices, massive consumer debt, corporate bankruptcies that also default on their pensions, and a brutal spike upwards for the price of home heating oil this winter, the picture is not one that should reassure would-be investors from the US middle class


  • Interesting discussion on GM's health care problems and issues they have dealt with in the past. Health insurance is a major aspect to many and I hope they can soon provide great coverage again.

    By Anonymous Blue Cross of California, at 2:47 PM  

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