S&P: GM, Chrysler could face "selective default"

NEW YORK (Reuters) - A distressed debt-for-equity swap for automakers General Motors Corp and Chrysler would lead to a "selective default" for the companies, but their ratings could climb to the "CCC" range upon completion of the bond exchange, Standard & Poor's said on Tuesday.

S&P rates both Chrysler and GM "CC," or 10 levels below investment grade, with negative outlook.

"The 'CC' rating on both reflects our view that they are going to pursue a distressed exchange offering bondholders something less than the original amount," auto analyst Robert Schulz said in an interview with Reuters. "We would consider that to be a default on the initial bonds."

GMAC LLC, the financing arm of GM, previously completed a distressed exchange and is now rated "CCC," or eight steps below high-grade.

A bond exchange is "not a legal default, but it's a rating default," Schulz said, noting the companies' ratings may be re-rated higher upon completion of any swap, possibly into the "CCC" category like GMAC.

"Right after the selective default, there's less debt and assuming other plans come together, there should be other improvements," he said.

(Reporting by Walden Siew; Editing by Leslie Adler)