DETROIT — A national credit evaluation company Friday lowered the rating of $23 billion in debt instruments issued by General Motors and its financing subsidiary, the first time the No. 1 auto maker's creditworthiness has declined in five years.
"While GM remains by far the largest domestic auto maker, it no longer dominates the market, having lost both styling and quality leadership," Standard & Poor's said in New York. "Indeed, GM's 1986 incentive financing programs reflect poor consumer acceptance of its cars."
Standard & Poor's reduced its rating of GM's senior debt and preferred stock and of General Motors Acceptance Corp.'s debt from AA+ to AA, calling the adjustment relatively minor in light of increased business risks, higher debt levels and the dwindling of the auto maker's cash balances by more than $4 billion since 1984.
GM's profits have been shrinking steadily for more than two years, and the company recently reported a pretax operating loss of $339 million for the third quarter.
'Very Strong Capacity'
The AA category means a company has "a very strong capacity to pay interest and repay principal." By removing the plus from the designation, Standard & Poor's is lowering GM's relative standing within the category.
Standard & Poor's last lowered GM's credit rating in 1981, at the depth of the recession, from the highest category, AAA, to AA+, said Elizabeth S. Mulhare, Standard & Poor's spokeswoman.
"We are obviously disappointed by this action," GM spokesman Donald Postma said. "General Motors is one of the most financially sound industrial organizations in the world, with a strong balance sheet and a substantial cash flow from operations."
Standard & Poor's move came a few weeks after GM announced widespread layoffs, part of a broad restructuring to make the auto-making giant more competitive.
Joseph Phillippi, automotive analyst with New York brokerage house E. F. Hutton, said the lower credit rating would likely increase GM's cost of borrowing by 25 basis points but would have only a nominal impact on earnings. A basis point is one-hundredth of a percentage point.
"I wouldn't say it is a sign they're in trouble," Phillippi said.
David Healy, analyst with New York brokers Drexel Burnham Lambert, said: "Frankly, I think the thing is mostly symbolic and that the actual rating change's effect on GM's earnings will get lost in the rounding. . . . My own feeling is they didn't cut the rating enough."
Standard & Poor's said GM's strategy of cutting the number of models and options would limit the depth of its product line and would require strong consumer demand for 1988 models for the company to maintain its present, weakened market share.
"The rating cut raises the cost of borrowing a shade but in no way affects their access to the credit markets," analyst Ann Knight of Paine Webber said.
In explaining its rating action, Standard & Poor's said GM's profitability will continue to be constrained by increasing competition in the U.S. car market and by the lackluster return on GM's large investments in high technology, including the Hughes Aircraft Co. acquisition.