S&P, Moody's cut ratings on General Motors

NEW YORK - Standard & Poor's Ratings Services cut General Motors Corp.'s corporate credit rating to the lowest junk level on Thursday, saying the Detroit automaker will likely offer to swap its debt at a steep discount — a move the agency said is tantamount to a default.

The ratings downgrade comes as humbled U.S. automakers pleaded with Congress for an expanded $34 billion rescue package, but heard fresh skepticism in a bumpy encore appearance.

S&P lowered GM's corporate credit to "CC" from "CCC+". Fellow credit ratings agency Moody's Investors Service late Wednesday cut its corporate family and probability of default ratings for both GM and Chrysler LLC to "Ca" from "Caa2." "Ca" is two notches above default. Moody's outlook on both automakers is negative.

Both ratings agencies said it's increasingly likely that GM will have to restructure its balance sheet. The company's proposed restructuring plan includes cutting its total debt, but if it does so by swapping the debt at a steep discount to face value, current debt holders would lose out.

Standard & Poor's credit analyst Robert Schulz said if GM does do that, S&P will likely lower GM's corporate credit rating to "SD," meaning selective default, and exchanged issue ratings to "D."

"GM has not specifically identified the mechanism for implementing the balance sheet restructuring, nor has it made any specific proposals to bondholders," Moody's said in a statement. "Nevertheless, the plan is suggestive of a transaction that would be viewed as a distressed exchange by Moody's if implemented."

Meanwhile, the continued decline in U.S. automotive demand and shift in consumer preferences makes it likely that Chrysler will run out of cash by the first quarter of next year if it doesn't receive government loans, Moody's said.

"Chrysler also faces the longer-term challenge of being highly dependent on the truck and SUV segments as market demand shifts toward smaller vehicles," Moody's said. "Moreover, it's announced new product pipeline through 2010 will not materially increase its position in the small vehicle segment."

Moody's said that even if Chrysler does receive a government loan, it will need to significantly restructure itself soon. And without that restructuring, it's likely that the automaker will be forced to file for bankruptcy protection in the near future.

The ratings service affirmed its "Caa1" corporate family and probability of default ratings for Ford Motor Co., saying that it appears the automaker has enough cash and available credit to last through the next 12 months.

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