Moody's cuts GM credit rating deeper into junk

NEW YORK, Aug 13 (Reuters) - Moody's Investors Service cut its ratings on General Motors Corp GM.N deeper into junk territory on Wednesday, citing the automaker's difficulties competing in the U.S. market and generating positive free cash flow.

GM is struggling against an accelerating downturn in its home market and high oil prices that have hammered sales of its trucks and SUVs, triggering a $15.5 billion quarterly loss, the third-largest in its 100-year history.

Annual industry sales could remain well below 15 million units through 2009, and GM will face difficulties establishing pricing power in the car and crossover segments, Moody's said in a statement.

Chief Financial Officer Ray Young has said GM is on track to free up $15 billion in liquidity with cost-cutting, asset sales and new borrowing under a July plan intended to reassure investors that the car maker can ride out the downturn.

These undertakings will help to boost the company's liquidity position, which consisted of $21 billion in cash and approximately $5 billion in committed U.S. credit facilities as of June 2008, Moody's said.

However, achieving the planned level of savings and the additional capital inflows may be challenging, and the company will need to demonstrate solid progress in order to forestall any further pressure on the rating, Moody's added.

"The most difficult challenge facing GM and the other domestic producers will be accelerating the introduction of fuel-efficient vehicles, and convincing consumers that these vehicles offer as good a value proposition as Asian product," Moody's said.

Moody's cut GM's corporate family rating one notch to "Caa1," seven steps below investment grade. The outlook is negative, indicating an additional downgrade may be likely over the coming 12 to 18 months.

Ratings on finance company GMAC LLC were unchanged at "B3," six steps below investment grade, with a negative outlook.

GM's 8.375 percent bonds due in 2033 fell to 53.5 cents on the dollar after the downgrade, down from 55 cents on Tuesday, according to MarketAxess.

The cost to insure GM's debt with credit default swaps fell to 41.5 percent upfront, from 43.25 percent at Tuesday's close, according to Markit Intraday. That means it costs $4.15 million to insure $10 million in debt for five years, in addition to annual payments of $500,000.

(Reporting by Karen Brettell; Editing by Chizu Nomiyama)