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Fitch downgrades GM’s ‘junk’ rating further

Citing headwinds in almost every direction, Fitch Ratings on Monday downgraded General Motors Corp.'s credit rating deeper into junk status.
/ Source: The Associated Press

Fitch Ratings downgraded General Motors Corp.’s credit rating deeper into junk status Monday, saying the automaker faces headwinds in almost every direction and its liquidity could drop to “minimum required levels” within the next year.

The credit ratings agency said it reduced GM’s issuer default rating one notch to “CCC” from “B-.” Both ratings are noninvestment, or junk, grade.

Fitch analyst Mark Oline said GM faces pressures from tightening credit in the U.S., weakening overseas sales, rising raw materials prices, continued sales declines in North America and the need for a large amount of capital spending to transform its lineup from trucks and sport utility vehicles to smaller, more fuel-efficient models.

“If industry sales stay flat in 2009 with a deeply depressed 2008, we do think that the revenue pressures that GM and the industry will face will likely be in excess of their ability to reduce costs,” Oline said in an interview. “So we do project that liquidity will continue to decrease, and the company’s access to capital is severely limited by the conditions of the industry and the capital markets.”

On Friday, GM said it was drawing down the last $3.5 billion of a $4.5 billion secured revolving credit facility to add liquidity during “uncertain times in the capital markets.”

The Detroit automaker has been profitable overseas but has lost $57.5 billion in the past year and a half as high gas prices and the weakened economy have sent domestic sales into a dive. GM burned through $3.6 billion in cash during the second quarter, although it said that rate should slow for the rest of the year.

Chief Financial Officer Ray Young has said GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion, which he called a strong position.

Oline said GM needs a minimum of $11 billion to $14 billion to keep the confidence of parts suppliers and consumers.

GM announced a liquidity plan in July that calls for cutting $10 billion in costs and raising another $5 billion through asset sales and borrowing over the next 15 months.

The company may have to cut more costs if the credit markets remain tight, Chief Operating Officer Fritz Henderson has said. While he expected GM to meet its liquidity targets, Henderson said last week that he could not predict what will happen in the credit markets, which affect consumer and corporate borrowing.

Tight capital market conditions also could spill into the market for asset-backed securities, affecting GM’s ability to competitively finance car and truck deals, Oline said.

At the same time, he said, there’s a strong likelihood that the U.S. auto industry will get loans from the federal government to transform its factories and product lineup. The industry wants Congress to fund $25 billion in loans that were approved in last year’s energy bill.

Oline said it’s also likely that the United Auto Workers union will allow GM to delay making payments into a trust fund that is to take on GM’s huge retiree health care costs starting in 2010. By then, the company also will see more benefits from its historic cost-cutting agreement with the UAW, Oline said. GM has pegged those savings at $3 billion per year.

Pickup truck sales, which had accounted for a huge chunk of GM’s revenue, are likely to rebound when the housing industry starts to recover from its slump, Oline said. If truck sales rebound by 2010 when GM starts to see more benefits from the UAW contract, and if the economy improves by then, GM could recover, he said.

“You could see some significant improvement in cash flow,” Oline said. said. “Clearly they need both time and liquidity, and the market is increasingly short on both.”

GM shares fell $1.50, or 11.5 percent, to $11.58 Monday.