As the global coronavirus pandemic continues to wreak havoc around the world, S&P Global Ratings has placed GM credit on watch. The financial services firm stated that there is a 50 percent chance that it will downgrade the automaker’s credit rating by one rung if GM facilities “remain idle for longer than we expect, causing its cash flow generation to turn negative, eroding its liquidity and increasing its debt leverage with no signs of an imminent improvement.” Meanwhile, Moody’s – another organization that specializes in financial credit ratings – also said it was considering cutting GM credit to junk status.
“A severe disruption in automotive demand due to the coronavirus, combined with the possibility of a follow-on economic recession, will place considerable pressure on GM’s cash flow and credit metrics,” Moody’s said in a statement.
General Motors isn’t the only automaker in danger of having its credit rating slashed. In fact, GM’s cross-town rival, the Ford Motor Company, already saw its credit rating downgraded to junk rating (BB+) by Moody’s at the end of March, and could see further cuts. It’s the second time in six months that Ford saw its credit rating downgraded as it faces restructuring issues that have yet to show tangible results. The coronavirus outbreak is just the latest to put even more pressure on the FoMoCo.
For its part, GM drew down $16 billion in available credit on March 24th, which will join the automaker’s then-current $15-16 billion in cash reserves. In a press release, The General described the move as a proactive measure to “fortify its balance sheet” while improving its “cash position and preserve financial flexibility in light of current uncertainty in global markets resulting from the COVID-19 pandemic.”
The ongoing COVID-19 pandemic continues to shock the global auto industry, as production has ceased globally and demand has diminished significantly. GM plants in the United States, Canada, Mexico, Brazil and in other areas of the globe has come to a halt, with no word on when plants will resume.
Idling all plants has very different repercussions for the financial health of an automaker as compared to going through an economic downturn, such as a recession. With zero production output, an OEM simply does not generate sufficient revenue to cover even minor costs. Meanwhile, the economy significantly weakens as other firms and businesses begin to lay off, furlough, or even dismiss workers, causing consumers to delay large purchases while also trimming discretionary spending. Automobiles are typically one of the very first items to see the impact of these spending cuts. As of late March, S&P expects the coronavirus pandemic to cut light vehicle sales by 15-20 percent in the U.S. and Europe as well as 8-10 percent in China.