Ford, GM, Suppliers Face Credit Downgrade Risk from Tariffs

Ford Motor Company (F.US) and General Motors (GM.US), along with nearly ten automotive component suppliers, are at risk of facing a downgrade in their credit ratings if the proposed automobile tariffs by the Trump administration are implemented. This warning comes from a recent report by S&P Global Ratings, which highlights the potential financial impact on these companies.

Analysts, including Nishit Madlani, have expressed concerns that the tariffs would significantly affect the profitability and cash flow of Ford and General Motors. Both companies currently hold investment-grade ratings from S&P, with Ford rated BBB- and General Motors rated BBB. The report suggests that these companies may struggle to offset the financial burden through other compensatory measures.

The report predicts that vehicles imported from regions outside North America would face a 25% tariff, while those assembled in Mexico, Canada, and the United States would be subject to more complex tax rates based on the origin of their components. The analysts emphasized the high level of uncertainty surrounding these predictions due to the Trump administration's fluctuating stance on tariff policies.

In a surprising turn of events, shortly after the report's release, President Trump indicated that he is considering temporary exemptions for the automobile tariffs. This move aims to provide companies with more time to establish production facilities within the United States.

The report also highlights that while most component suppliers may experience limited direct impact from the tariffs, as costs could be passed on to vehicle manufacturers, some suppliers with high debt levels and fragile cash flows are at greater risk. Companies such as Cooper-Standard, Burgess Point Purchaser Corp., and IXS Holdings Inc., which are already rated as junk, are particularly vulnerable.

The analysts anticipate a decline in U.S. automobile sales by approximately 2% this year, potentially reaching around 15.5 million units. Consumer vehicle prices are expected to rise by 5% to 10%. Additionally, the report warns that if China implements export restrictions on seven rare earth elements, it could further disrupt the supply chain and exacerbate the decline in sales.