General Motors Corp. debt appears to be heading for junk status, which would keep it out of investment-grade portfolios, said Edward I. Altman, professor of finance at Stern School of Business, New York University, and an expert on credit markets.
"GM has the profile of a non-investment-grade company. I think it is definitely headed" toward junk-bond status, Mr. Altman said at the "Latest in Equity and Fixed-Income Research" conference in Chicago in March. "The auto industry has so much overcapacity. GM has to close plants, but that's going to be very expensive because of legacy costs" such as pension expenses.
GM's long-term debt is rated by Standard & Poor's at BBB- and by Moody's Investors Service at Baa2, one notch above non-investment-grade status. The Detroit-based company's bonds trade at a yield above 8%, when bonds in its rating class trade about 200 basis points lower, he said.
And if the two rating firms downgrade GM to non-investment grade, Lehman Brothers Inc. would remove it from its investment-grade index. Starting in July, a bond will need investment-grade ratings from two rating firms to be included in the Lehman Investment Grade Aggregate index. Previously, the firm used the lower of the S&P or Moody's ratings.