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GM bankruptcy isn't ‘far-fetched’, S&P says

A bankruptcy by General Motors Corp. is not "far-fetched" if present trends at the company persist, Standard & Poor's said Monday, shortly after cutting world's largest automaker's ratings deeper into junk territory.
/ Source: Reuters

A bankruptcy by General Motors Corp. is not "far-fetched" if present trends at the company persist, Standard & Poor's said Monday, shortly after cutting world's largest automaker's ratings deeper into junk territory.

The downgrade and S&P's comments initially sent GM shares and bonds lower as investors fretted about the rising risk that the company will have trouble repaying its debt.

"In the past, we might have felt at different points that the concerns about bankruptcy risk were way overplayed," said Scott Sprinzen, speaking on a conference call with reporters and analysts.

"At this juncture, it's our conclusion that this isn't a far-fetched possibility if the kind of deterioration in results we've seen over the last few quarters should continue," Sprinzen said.

GM spokeswoman Gina Proia said the automaker has no strategy or intention to declare bankruptcy.

"GM has an aggressive and well thought-out strategy to turn around our North American business and we're making progress in some important areas," she said.

S&P cut GM's corporate credit rating by two notches to "B," five steps below investment grade, from "BB-minus." The outlook is negative, meaning the rating is likely to be lowered again over the next two years.

S&P's rating on GM is the lowest of the three major rating agencies.

GM has lost nearly $4 billion this year as it battles high health care and commodity costs, eroding U.S. market share and slumping sales of its once-profitable sport utility vehicles.

Consolidated debt outstanding was $285 billion on Sept. 30, S&P said.

"The changes that will have to occur to turn this company around to cause it to be a profitable auto manufacturer are huge," said Dan Zaldivar, fixed income analyst at RBC Capital Markets in Chicago. "This is a very big ship and it turns very, very slowly."

Ratings on GM's finance arm, General Motors Acceptance Corp., were not changed but remain on review with "developing" implications, meaning the direction of the rating is uncertain.

The developing status reflects the possibility that GM may sell a controlling stake in GMAC to a highly rated financial institution, in which case its investment-grade rating could be restored, S&P said.

If GM does not sell a majority stake in GMAC, GMAC's ratings would be lowered to the level of GM's, Sprinzen said. S&P has long rated GM and GMAC the same because of the control GM has over GMAC and because their businesses are intertwined.

A GM bankruptcy would ultimately lead to one at GMAC as well, Sprinzen added.

S&P's downgrade came on the same day that bids were due to buy a controlling stake of GMAC as GM tries to restore the unit's investment-grade ratings. Borrowing costs at GM and its financial unit have soared since they were first cut to junk in May.

"This year has witnessed a stunning collapse of GM's financial performance compared with 2004 and initial expectations for 2005," S&P said in its rating statement.

Net losses at North American operations could reach $5 billion for the year, even before substantial impairment and restructuring charges, the rating agency said.

An industrywide falloff in demand for sport utility vehicles makes it doubtful that GM's new models can help restore its North American operations to profitability, S&P added.