General Motors Corporation’s debt rating was cut one level to Baa3, the lowest investment grade, by Moody’s Investors Service. The ratings company also said it was reviewing Ford Motor Company’s debt for a possible downgrade.

Moody’s yesterday said Ford and GM, two of the world’s five biggest bond market borrowers, are both losing American auto-market share while health-care costs are growing, pushing profits lower. Moody’s began reviewing GM’s ratings on March 16, when the automaker forecast its biggest quarterly loss since 1992.

“What Moody’s did today is publicly state that they’re concerned about the state of the North American auto industry,” says Sasha Kamper, who helps manage $65 billion, including GM and Ford debt, at Principal Global Investors in Des Moines, Iowa. “GM’s rating move was widely anticipated. I think the market might have been a little surprised that they were so quick to act on Ford since there was no new news on Ford.”

Falling credit ratings have increased borrowing costs at GM and Ford, the two biggest American automakers, forcing them to reduce expenses by cutting jobs and demanding lower prices from suppliers.

Both companies have already begun to rely more on bonds that use auto loans as collateral and debt sold directly to individual investors to avoid the higher cost of bond debt. The Moody’s actions affect about $175 billion of Ford debt and about $200 billion of GM debt.

The review of Ford’s ratings was prompted by “increasing risk,” Moody’s said. Ford, based in Dearborn, Mich., may not meet a 2006 target of $7 billion in pretax profits. New York-based Moody’s rates Ford debt at Baa1, three levels above non- investment grade.

The downgrade brings GM one step closer to being rated junk and may endanger its inclusion in the Lehman Credit Index, a benchmark for many bond managers, some investors said. Many institutional investors can’t hold debt that isn’t included in the index.

Ford is the second-largest issuer in the index and GM is fifth, according to Lehman. Both companies are bigger issuers than Mexico or Italy.

Lehman in February made it less likely that GM would be dropped from the index. The firm added evaluations from Fitch Ratings to its measures of creditworthiness starting July 1. Now that Moody’s, S&P, and Fitch are included, two of three must rate a company at junk before it is dropped.

Moody’s said it will review GM’s progress in another six months to determine whether additional action is needed, according to the statement. The automaker needs to maintain U.S. market share “near” 26% and maintain the balance of a voluntary fund to pay future employee health-care costs at $18 billion or higher, the statement said.