Moody's Investors Service raised the corporate debt ratings for General Motors Co. and Ford Motor Co. on Thursday, citing new labor agreements and improvements in their finances.
The ratings were raised from "Ba2" to "Ba1," which is one notch below investment grade. The upgrades will make it cheaper for the automakers to borrow money.
Ford and GM's debt fell below investment grade in 2005 when the companies were deeply indebted. GM later declared bankruptcy and took government loans to stay afloat, while Ford borrowed heavily to fund a restructuring. Both are now profitable. The U.S. government still owns 27 percent of GM.
Moody's said new contracts with the United Auto Workers union will give the companies a more competitive and flexible cost structure. The agreements give workers profit-sharing checks instead of annual raises, and they also allow the companies to hire more new workers at lower wage rates than longtime workers. The contracts, which were approved by workers over the last month, cover 48,500 U.S. factory workers at GM and 41,000 at Ford.
Both companies said the deals will hold their labor costs steady and have only a small impact on profits through 2015.
Moody's said GM has competitive products and a strong position in China and other high-growth markets. Moody's said its new rating on GM's debt takes into account possible pressures on the company, including that of another recession in the U.S., the debt crisis in Europe and the difficulty of rolling out competitive new products.
GM made a net profit of $5.4 billion during the first half of this year, and it made $4.7 billion in 2010. It is to report its third-quarter earnings Nov. 9.
Moody's said the volatile economic situation in Europe is the major barrier to Ford winning investment-grade status for its debt. Moody's said Ford also needs to continue its plan to globalize its products, instead of offering different products in each region, and accelerate the rollout of new products.
Ford earned $1.6 billion in the third quarter and $5 billion in the first half of the year. The company earned $6.6 billion in 2010.
Moody's assigned a positive outlook to both companies and said it will consider further ratings increases.
Standard & Poor's and Fitch ratings agencies also recently upgraded Ford and GM.
GM shares rose 5 percent to close at $26.32. Ford shares rose 2 percent to $12.08.