Both GM and Ford, the two remaining auto companies in the U.S have had their bond ratings reduced to “junk” status. What does that mean and why did it happen?
The junk bond status means that the two
main companies that rate bonds do not believe that the bonds issued
by GM and Ford are secure investments for pension funds or other
conservatively managed portfolios. The chances that all the
remaining coupons for the outstanding bonds of these two companies
will be paid and the full face value of the bonds will remain for the
life of the bond is below 100% ... significantly below 100%.
Both of these auto companies are selling over $100 billion worth of vehicles and parts, but their liabilities exceed their assets. In the normal course of business, both companies would be bought by experts at dismantling companies and the salable parts of the business would be sold off, some money would be paid out to the dismantling experts and the rest of the company would be thrown into bankruptcy to resolve the net debt issues. A bankruptcy court would pay off some of the creditors, revise union contracts and salvage what is left of the core auto business to be sold to Toyota and Honda.
There are political problems with this
scenario so the people who rush in to do the salvage work have good
reason to be leery.
The preeminent financial problem in both cases are large future debts for pensions and high current union labor contracts.
The real problem at the root of the current situation is the reason these two companies got into their current straits. These are two behemoths that are so large and unmanageable that they are incapable of making change. You can readily note that neither company has ever been able to construct a small car to compete with imported small cars. Both companies have seen the market for small cars since 1966 and yet they have never been able to build a small car. Both companies have seen the market for high mileage cars since 1973 and neither has been able to build a high mileage car. Now that both companies are able to see the market for hybrid gas/electric engines, still, neither is capable of manufacturing such an engine.
The lesson in this is that Americans
don't have the managerial skills to cope with a global company this
large that faces market competition. AT&T and Sears faced the
same fate and died as have many other behemoth global companies
ranging from advertising giants, sewing, steel, mining and consumer
product giants. IBM and GE are exceptions. Only time will tell
about the two global retail giants, WalMart and MacDonald's.
I don't mean to imply that people other than Americans can run giant global corporations. There is no strong evidence for that proposition. There are several giant companies in Japan that continue strong but there isn't enough time to evaluate them. (The four zaibatsu have nothing to commend them.)