Credit agency Moody's further cuts General Motors' debt rating

Tuesday, January 31st 2006, 10:12 am

By: News On 6

DETROIT (AP) _ Moody's Investors Service lowered General Motors Corp.'s debt rating further into ``junk'' territory Tuesday, citing uncertainty the company can establish competitive wages and benefits without filing for bankruptcy protection.

Moody's lowered GM's $30 billion (euro25 billion) in debt one level to B2 from B1, five rungs below investment grade. It also assigned the company a negative outlook, actions that will make it harder for the world's largest automaker to borrow money. Moody's had placed GM under review for a possible downgrade on Jan. 26.

The credit agency didn't take any action on GM's finance arm, General Motors Acceptance Corp. GM is trying to sell a majority stake in GMAC in order to boost its credit ratings.

GM spokeswoman Gina Proia said the company already has taken some major steps to return to profitability, including a plan to cut 30,000 jobs and close 12 plants by 2008. GM lost $8.6 billion (euro7.2 billion) last year, largely because of a reduction in market share and high costs in North America, where it lost $5.6 billion (euro4.7 billion).

``We do have a well-thought-out strategy for improving North American operations, and we're rapidly implementing that strategy,'' Proia said.

Moody's said GM's future depends on two things: its ability to win wage and benefit concessions from the United Auto Workers during 2007 contract negotiations and the restructuring of Delphi Corp., its former parts division and largest supplier.

Last year, the UAW agreed to make retirees pay more for their health care, a change expected to save GM at least $1 billion (euro840 million) per year after taxes. But Moody's said much more is needed, including a reduction in health care spending for active workers and changes to the jobs bank, which pays wages and benefits to thousands of laid-off workers. Getting the necessary level of relief from the UAW ``will be a long and challenging process,'' Moody's said.

``Moody's remains concerned that in the absence of material progress in reducing its UAW-related cost burden through negotiations, GM could resort to bankruptcy as an option to reduce this burden,'' Moody's said.

A successful reorganization of Delphi also is critical, the agency said. Delphi has set a deadline of March 30 to reach an agreement with GM and the UAW that would lower its labor costs. GM estimates it will have to pay from $3.6 billion (euro3.02 billion) to $12 billion (euro10.08 billion) as part of the agreement, which could include worker buyouts.

If no agreement is reached, Delphi plans to ask a bankruptcy court judge to void its union contracts by March 31, an action the UAW says could lead to a strike. GM can't afford a protracted strike, Moody's said, but it also can't afford to continue paying $2 billion (euro1.68 billion) more per year than it needs to for Delphi parts.

GM also is under pressure because of declining U.S. market share and a shift in consumer preference away from its profitable trucks and sport utility vehicles, Moody's said. GM's U.S. sales fell 4 percent in 2005.

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