GM Fears Junk Rating After Alert on Profits

General Motors yesterday stunned US equity and bond markets with a profits warning which triggered fears that the world's biggest carmaker could see its debt rating cut to "junk".

The Detroit-based group now expects to make a first-quarter loss after earlier predicting it would break even or make a profit, sending its shares and bonds into a spin. Its shares fell 11% in early dealing. It blames lower than expected production and an intensifying price war for the revision to its earlier forecasts.

It also expects a negative cash flow of $2bn (£1bn) in 2005 compared with previous expectations of a $2bn inflow.

In January the debt rating agency Standard & Poor's gave GM's long-term debt a BBB - just a notch above junk. It said then it regarded the rating as stable and would review its position over the first half of the year. However it reserved the option to undertake "a more immediate review if developments warranted such action".

Other agencies have a slightly higher rating on GM debt which in September was put at some $290bn, making it one of the largest corporate debt issuers in the US.

Commenting on yesterday's announcement that the group was now expecting to report a first quarter loss of $1.50 a share Christophe Boulanger, an auto credit analyst at investment bank Dresdner Kleinwort Wasserstein, said: "This should be the trigger. At best I'd expect a negative outlook from S&P, at worst a credit watch negative with a potential cut to junk."

If GM's debt was cut to junk it could have a serious impact on the carmaker because it would force investment funds which are only allowed to hold investment grade rated paper to sell. Yesterday no one at S&P was available to comment.

GM said that its previous outlook had been based on producing 1.25m vehicles in North America but it had now cut that by about 70,000. "While we have made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do more," GM's chief financial officer, John Devine, said.

The chairman and chief executive Rick Wagoner said that while the group faced "significant challenges" in North America the rest of the automotive business and the group's financing arm were in line or ahead of expectations.

Analysts expect other carmakers to face similar problems. David Cole, director of the Center for Automotive Studies, said higher fuel and raw material costs were creating " a perfect storm".