Bond Ratings For GM, Ford and DaimlerChrysler

There are various cyclical and structural issues currently hurting
profitability of the big three auto manufacturers.  DBRS is maintaining
the rating for these companies in the A range given the belief that most
of the earnings weakness is due to cyclical issues that should only be
temporary and short lived.  Although at this point it appears less
likely, if the current downward cycle is long lasting, or if deeper
structural problems develop, there potential for rating downgrades.

While the difference is not great, DBRS differentiates the ratings for
big three placing GM as the strongest, followed by Ford and then by
DaimlerChrysler. Four structural problems that are a concern and could
affect the ratings include.  (1) All three auto companies are presently
experiencing market share pressure due to strong competition from the
Japanese.  
The one major exception from this trend, GM, is gaining share
in trucks and SUVs (where it is currently earnings most of its profits)
mostly at Ford's expense due to strong new model introductions.  (2) All
three manufacturers have excess North American plant capacity with GM
being the worst followed by DaimlerChrysler and Ford.  The strength of
the unions, along with other issues will make it very difficult for all
three manufacturers to close capacity.   

Ford recently announced a restructuring program aimed at increasing its 
plant capacity utilization from the current level of about 95% to up to 110%. 
It still has to negotiate this with its unions.  
DaimlerChrysler has the most difficult
time since it would have to drop a model in order to close a plant. GM
has the most excess capacity but is currently under less pressure given
its better level of earnings. (3) Ford and GM post poor returns outside
North America, and it will be a time consuming and difficult process to
improve upon. Profits outside North America are a major strength and are
the main contributor for DaimlerChrysler.  (4) The big three are
dependent on large trucks and SUVs for profitability.  This segment is
becoming more competitive, increasing CAFE standards will add to the
cost of these vehicles, and consumer demand may weaken.

The remainder of the problems are more cyclical or isolated.  (1) The
profit decline in 2001/2002 is significant but is mainly related to a
cyclical weakness in demand which should reverse itself by 2003. (2)
Quality control issues have arisen at Ford especially, as other
companies improved in quality control while Ford did not. (3) Loss rates
are growing at the captive finance companies, due to downward pressure
on used car prices, and problems with residual value of leases.  (4)
With lower income, and capex remaining high, the companies are
experiencing negative free cash flow, which must be borrowed.  This cash
flow deficiency will continue through 2002, and meanwhile the balance
sheets and financial flexibility is weakening.

Dominion Bond Rating Service Limited (DBRS) will publish a commentary
shortly that will provide additional analytical detail on this industry.
If you are interested in receiving this report, please contact us at:
info@dbrs.com.

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