GM Debt Gets The Junk Rating It Deserves

S&P gave GM a corporate rating of “BB-,” which put it well into “junk” territory. However, the credit agency was optimistic about some of the No.1 American car company’s prospects. GM made money in North America in its last reported period.  S&P believes that GM can sustain global single digit pretax margins and positive operating cash flow this year.

The rating is not dependent on the firm’s planned IPO.

S&P showed a number of warning flags in its ratings notes as well.

The company’s still-high dependence on light trucks for profitability in North America, despite GM’s recent focus on new car introductions

The need for customers’ perceptions of its vehicles to improve

S&P also said that GM does not build enough small and fuel efficient cars.

GM’s problem is that it builds cars that consumers do not like and which research firms like JP Power find wanting. The ratings company’s recent “Initial Quality Survey” was dominated by vehicles from Japan, Germany, and Ford Motor (NYSE: F). The JD Power “Most Dependable Vehicles” list had a few GM-built cars, but they were still eclipsed by foreign-made vehicles and those from Ford.

GM’s year-to-date sales are only up 6.8% through September. That compares to 21% for Ford and 1% for beleaguered Toyota Motor (NYSE: TM).

GM faces an uphill battle against companies that have improved market share, models that consumers want, and strong balance sheets. GM may have to turn increasingly to incentives to keep the share of customers it has. GM does very well in China, but that will not be enough to offset its troubles in the American market.

GM is in a position in which it may not have to time to become competitive fast enough. It is a good idea for the Treasury to dump its shares as soon as possible.

Douglas A. McIntyre