Auto downgrade snaps bond inertia

GM’s credit rating fell to BB and Ford’s was lowered to BB+, reflecting S&P’s scepticism surrounding both companies’ management strat-egies and mounting competitive challenges. The ratings outlook for both firms is negative, says S&P.

For GM this is the second drop in its bond ratings this year. Following the company’s announcement in March of expected first-quarter losses of $850m (446m), S&P downgraded GM’s credit rating from BBB to BBB- (Fund Strategy, March 21).

Stephen Snowden, manager of Old Mutual’s Corporate Bond fund, says: “It was a bold and aggressive move by S&P and ends the debate surrounding the companies’ ratings. The investment-grade corporate bond market has been waiting for this to happen. Now the monkey is off its back, the market should rally. We have bought investment-grade bonds following the announcement.”

Snowden adds: “Few would have expected this move before July. It is now simply a case of waiting to the middle of next week to see what damage has been done to the firms’ bonds. GM and Ford combined have about $200bn in outstanding bonds and investors will look to move their money elsewhere. This will boost the investment-grade markets and damage high-yield.”

He says the combination of S&P’s downgrades and recent low-quality issuance of junk bonds will cause problems for the high-yield markets. Credit spreads between corporate and government bonds have recently widened following a prolonged period of declining bond yields and narrowing spreads.

Andrew Crawford, Threadneedle Investments’ director of investment-grade credit, says: “The GM downgrade was harsher than expected and the negative outlook means there is a prospect of further downgrades over the next 18 months. The second surprise was that Ford was downgraded at the same time.”

Crawford adds: “The reaction from the market has been muted and calm. It has isolated these issues from the rest of the bond market. Investors were reasonably well prepared for it.”

He says GM’s falling market share in a declining industry is not at all positive for the outlook for profitability in the second quarter.

Investors may also see structural changes at the lower-risk end of bond markets in America. The US Treasury announced last week that it is planning to reintroduce 30-year bonds, less than four years after its decision to stop issuing them.