Fitch cuts GM's rating, cites bankruptcy risk

NEW YORK (Reuters) - Fitch Ratings on Friday cut its rating on General Motors Corp to "C," the last step above default, saying the threat of a bankruptcy remains after the government announced an automaker rescue plan.

President George W. Bush earlier on Friday announced $17.4 billion in emergency loans to faltering U.S. carmakers in a dramatic step to save the industry from imminent collapse.

Terms of the government loan include a reduction in GM's debt load, expected to be in the form of a "distressed debt exchange," which is a default under Fitch's rating methods, the rating agency said in a statement.

Rating agencies generally count debt exchanges as defaults when bondholders take a loss and when a company is doing an exchange to avoid a bankruptcy or liquidity crunch.

Fitch cut GM's rating by two notches to "C," indicating default is imminent, from "CCC."

Fitch said it may also lower its estimate of the amount bondholders will recover from its current projection of 10 to 30 percent. Unsecured debt holders could lose 50 percent immediately under a distressed debt exchange, Fitch said. Recoveries would be further hurt by the fact that the government loans will be placed in a senior position to existing unsecured debt, as well as a decline in the value of GM's equity interest in finance company GMAC, Fitch said.

Finance company GMAC is 49 percent owned by GM.

(Reporting by Dena Aubin; Editing by Leslie Adler)