BMW AG, Ford Motor Co. and Toyota Motor Corp. were downgraded by Moody's Investors Service, and their major European, U.S. and Japanese competitors were put under review for possible cuts as the coronavirus pandemic raises risks for automakers worldwide.
BMW, the European carmaker with the best credit profile, was dropped one level to A2, while Ford's rating fell to Ba2, another rung into junk. Moody's put General Motors Co. under review along with Daimler AG, Jaguar Land Rover Automotive Plc, PSA Group, Renault SA, Volkswagen AG, Volvo Car AB and McLaren Holdings Ltd. In Japan, Toyota, Nissan Motor Co. and Honda Motor Co. were downgraded on Thursday.
The rapid spread of the outbreak, a deteriorating economic outlook, falling oil prices and asset price declines are "creating a severe and extensive credit shock," Moody's said in a statement. "The combined credit effects of these developments are unprecedented."
Auto manufacturers and their parts suppliers have halted factories on both sides of the Atlantic as governments take measures to isolate populations and restrict travel.
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Demand will drop "meaningfully" over the coming months, especially in Europe and North America, Moody's said. It anticipates global demand will shrink about 14% in 2020 and could slump by roughly a third in the second quarter.
'UNDER PRESSURE'
Japanese automakers are especially vulnerable because of the pandemic exacerbating "pronounced cyclical downturns and changing consumer demand," Moody's said, leaving them "vulnerable to shifts in market sentiment in these unprecedented operating conditions."
Toyota, which had the strongest credit profile among Japan's auto companies, was cut to A1 from Aa3, while Honda was downgraded to A3 from A2. Nissan, which has seen decade-low profits and management turmoil since the November 2018 arrest of former Chairman Carlos Ghosn, was already the lowest in terms of credit ratings out of Japan's top three carmakers. Moody's cut Nissan's rating to Baa3 from Baa1.
Moody's for now assumes GM and Ford's full-year shipments will drop by as much as 18%, though it warned "risk to the downside is considerable."
S&P Global Ratings still ranks Ford one step above junk. On Wednesday, the firm also put GM's rating on watch for negative action.
"Automaker credit rankings are increasingly under pressure -- another negative catalyst for bondholders -- and we suspect more downgrades loom globally, with Ford and Renault possibly becoming fallen angels," Bloomberg Intelligence analyst Joel Levington said in a note.
LOAN BUSINESS A BOOST
While GM probably can avoid a junk rating, falling into speculative grade causes problems for automakers' lending units, Levington said by phone. Both GM and Ford get a lot of cash from writing auto loans, and lower-rated debt makes borrowing more expensive.
"It's not the end of the world if one of these companies falls into high-yield," he said. "But both Ford and GM make a lot of money from financing, and their margins would go down."
VW brand's global sales chief Juergen Stackmann told Frankfurter Allgemeine Zeitung in an interview that he expects a "normalization" of the situation on the German manufacturer's home turf in the summer.
The outlier in Moody's latest report was Fiat Chrysler Automobiles NV, placed under review "with uncertain direction." The Italian-American manufacturer faces the same daunting situation as peers, but the planned merger with PSA might result in a higher rating of the combined group than Fiat Chrysler's current standalone rating, it said.
BMW's downgrade was driven by its already weak standing within the A1 ratings category, the agency said.
The Munich-based carmaker last week warned that both profit and sales would fall significantly this year as the pandemic disrupts production and supplies. The company has idled its European plants, as well as its largest plant in the U.S. in South Carolina, for more than two weeks.
HEAVY CORPORATE DEBT
S&P Global Ratings and Moody's are downgrading U.S. companies at the fastest pace in more than a decade as debt-saddled corporations and entire industries struggle with a dramatic slump in demand brought on by the coronavirus pandemic.
Downgrades are outpacing upgrades at the two biggest credit-rating firms by more than 3 to 1 to start the year, the most on a quarterly basis since the depths of the financial crisis, according to data compiled by Bloomberg.
From autos to oil, investment grade to high yield, few parts of the American credit landscape have been spared the onslaught of downgrades that has accompanied the covid-19 outbreak. With an unprecedented number of companies loading up on cheap debt in recent years, it's likely that more are on the horizon. And concern is mounting that a wave of defaults could soon follow as capital markets remain closed to all but the safest borrowers.
S&P has cut more than 280 long-term ratings so far this quarter, also on pace to be the most since the crisis, the data show. Of them, more than 170 have come this month alone. Roughly 75 companies have been upgraded in 2020. Moody's has downgraded more than 180 companies, including about 20 investment-grade firms and 160 junk-rated borrowers.
Information for this article was contributed by Olivia Raimonde of Bloomberg News.
Business on 03/27/2020