Credit downgrades: More or less junk
Everyone expected the downgrade of Ford and General Motors to junk status. Now it has happened, the long-term consequences for the market are unclear. The move threatens to wipe out the trading profits of hedge funds and banks, with CDOs causing particular concern. Mark Brown reports.
IT WAS ALWAYS going to take something special to make the WorldCom debacle look a little insignificant. The Standard & Poor's corporate auto ratings team managed it on May 5 when they announced a downgrade of Ford Motor Company by one notch to BB+ and General Motors by two notches to BB with a negative watch, turning both into high-yield credits. The downgrades hit nearly $90 billion of index-eligible debt. That's almost three times the $30 billion affected by the WorldCom downgrade in 2002. The debt capital markets have never experienced anything like this.
"The magnitude is unprecedented," says Craig Abouchar, senior fund manager at Insight Investment in London. The other difference is the level of uncertainty that S&P has created in the debt and credit markets – an uncertainty that could last for months. "When WorldCom happened – boom! Two weeks later it was out of the index. You had to find buyers and sellers all at once." At the time of writing, it was still not certain whether Moody's Investor Services would follow S&P's lead in making Ford and GM junk, but Fitch downgraded GM and its subsidiary GMAC to BB+ before the end of May.