Corporate Distress and Restructuring with Macroeconomic Fluctuations: The Cases of GM and Ford

Traditional methods for evaluating corporate credit risk rarely consider the impact of the macro economy on corporate value and performance. We argue that lenders and management can obtain valuable information about the need for and approach to restructuring by decomposing default predictions into intrinsic and macroeconomic factors. We apply a method previously used for measuring macroeconomic exposures on default predictions in order to filter out macroeconomic factors. In this paper the method is applied on an analysis of the Z-scores for GM and Ford for the period 1996-2005. The macro economy has affected the two firms in different ways with implications for managements' and creditors' approaches to restoring their financial health.