S&P; Drops Boom on Ford, GM

DETROIT —  Credit rating agency Standard & Poor’s significantly downgraded the ratings of Ford Motor Co. and General Motors Corp. on Monday, dealing the two auto makers a setback in their efforts to improve performance and market share.

S&P; reduced both auto makers’ long-term corporate credit ratings by two notches, from A to BBB+, its third-lowest investment grade, meaning that it will be more expensive for the firms to sell bonds to raise capital. It also lowered their short-term ratings to A-2 from A-1, meaning less easy access to commercial paper, or short-term debt.

The downgrading came as Ford and GM are preparing to post disappointing third-quarter earnings. On Wednesday, Ford is expected to report a third-quarter loss of 28 cents a share, down from a 50-cent profit a year ago.

he consensus among analysts is that GM will announce on Thursday a third-quarter profit of 80 cents a share, down to nearly half of its $1.55 earnings per share in the same quarter last year.

S&P; said, “The downgrades reflect Standard & Poor’s concerns about the long-range profit potential of both GM and Ford, in light of ... deterioration in industry fundamentals.

“Intensifying price competition in the companies’ core North American market has resulted in significant declines in profitability this year, notwithstanding industry demand that has been far stronger than previously assumed,” it said.

S&P; says its bleak outlook for the automakers includes an assumption that the economy will continue to deteriorate.

S&P; put Ford, GM and DaimlerChrysler on credit watch in August, where DaimlerChrysler remains.

The rating agency said it will complete its review of DaimlerChrysler by the end of the year.

The downgrades also applied to the auto makers’ finance arms, Ford Motor Credit Co. and General Motors Acceptance Corp.

“The timing and the degree of today’s downgrade are both surprising and unfortunate given that we are in the midst of what may be among the strongest months in U.S. automotive history,” GM spokeswoman Catherine Dunsby said.

Ford also said it was disappointed with the credit downgrade. “Despite the difficult economic environment, Ford continues to have considerable financial strength and flexibility to adequately fund our global business needs,” spokesman Todd Nissen said.

Carl de Jounge, vice president of global credit research at Deutsche Banc Alex. Brown, said he hadn’t expected the credit move so soon. “The timing and the degree of the downgrade are a little surprising,” he said. “I would have expected S&P; to wait for third-quarter earnings and maybe even clarity on what kinds of rationalization or restructuring programs would be taken.”

Ford, GM and the Chrysler arm of DaimlerChrysler also face the prospect of diminished earnings contributions from their sport-utility vehicles and pickup trucks. SUVs and pickups have accounted for a disproportionately large share of overall profit, despite relatively strong sales in a year that could reach about 16.2 million vehicles, or the third-best year ever, S&P; analyst Scott Sprinzen said in a conference call.

“While volume has been great, that hasn’t been converted into real prosperity by the Big Three, given market share pressures,” Sprinzen said. “They haven’t experienced the full benefit of the volume since much of it has been taken up by non-U.S. players.”

Pricing pressure also has been intense, underscored by the Big Three’s offer of interest-free loans of up to five years on 2001 and 2002 models of cars and trucks to jump-start sales after the Sept. 11 terrorist attacks on New York and Washington. The 0% financing will cost the auto makers up to $3,000 per vehicle, according to industry estimates.

Ford in particular has had a rough year, marked by the recalls of millions of Firestone tires fitted mostly on Ford trucks and gains in productivity and quality by Ford’s American rivals.

The Firestone affair “at the least has been a major distraction and affected productivity and quality and shaken our confidence that Ford was the best managed of the three,” Sprinzen said.

Ford’s shares closed unchanged Monday at $17.73 on the New York Stock Exchange, and GM’s ended the day at $44.90, up 72 cents.

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Times wire services were used in compiling this report.