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Rating Action:

MOODY'S AFFIRMS RATINGS OF FORD (SR. AT Baa1), FORD CREDIT (SR. AT A3 AND SHORT-TERM AT P-2) AND HERTZ ( SR. AT Baa2 AND SHORT-TERM AT P-2); OUTLOOK REMAINS NEGATIVE

29 Apr 2004
MOODY'S AFFIRMS RATINGS OF FORD (SR. AT Baa1), FORD CREDIT (SR. AT A3 AND SHORT-TERM AT P-2) AND HERTZ ( SR. AT Baa2 AND SHORT-TERM AT P-2); OUTLOOK REMAINS NEGATIVE

Approximately $180 Billion of debt Affected.

New York, April 29, 2004 -- Moody's Investors Service affirmed the ratings of Ford Motor Company (senior at Baa1), Ford Motor Credit Company and its subsidiaries (senior at A3 and short-term at Prime-2), and The Hertz Corporation (senior at Baa2 and short-term at Prime-2). The outlook remains negative.

The affirmation of the Ford ratings reflect the steady progress that the company has made in achieving key operational, competitive and financial benchmarks since the 2002 initiation of its revitalization program. Moody's anticipates that Ford will make further progress through 2006, particularly in the increasingly critical areas of new product launches, and product quality. The company should also benefit from the US economic recovery. As a result, Ford's automotive earnings, cash generation and debt protection measures should continue to strengthen. This should help keep the automotive operations on track for meeting its 2006 objective of $4.0 billion in profit before taxes (PBT), and approximately $3.0 billion in free cash flow (cash flow after capital expenditures, common dividends, required pension plan contributions, but prior to dividends from Ford Credit and any extraordinary sources/uses of funds). The rating affirmation also anticipates that Ford Credit will maintain PBT of around $2.5 billion and will be capable of making an annual dividend payment exceeding $1.0 billion. Moody's expects that if Ford remains solidly on track to meet these 2006 financial objectives and to achieve the competitive position envisioned in its revitalization, the company could become more securely positioned within the Baa1 rating category by some time in 2005.

The affirmation of Ford Credit reflects Moody's opinion that the finance operation continues to demonstrate financial and operational characteristics consistent with its rating level. The one notch rating differential with Ford, which is more fully explained in Ford Credit-related research, remains in place as Ford Credit's improving performance has taken pressure off of this rating distinction. In 1Q2004, the company showed meaningful progress in improving its asset quality, though the pace of improvement to that point had been slower than expected. Better frequency trends and stronger used care values led to far better results than those posted in the last several years. In addition, Ford Credit's liquidity position remains solid given its access to the asset-backed securitization market

The negative outlook reflects the intense competitive environment that Ford faces in its automotive markets. This environment is characterized by global overcapacity, accelerated new-product programs by all competitors, and a commitment by virtually all auto manufacturers to become a viable player in every product and geographic segment of the industry. These competitive challenges could contribute to severe and ongoing price discounting, and could further pressure Ford's earnings and share position. The company will also remain vulnerable to other uncontrollable developments that could materially dampen its financial results. These developments include the possible shift in consumer preferences for more fuel efficient vehicles in North America, an acceleration in healthcare costs, or an unanticipated economic downturn. Notwithstanding these challenges, Moody's believes Ford's progress in various controllable areas -- continuing to improve product quality, reducing variable costs, maintaining a robust new product program, expanding its flexible manufacturing capabilities, and improving its operating leverage -- will continue. This should help Ford establish a sustainable business position within the competitive and operating environment that will likely evolve over the next several years. Moreover, the company remains committed to maintain a very strong liquidity position, currently characterized by $26.5 billion in cash and virtually no net debt at the automotive unit. This liquidity position affords the company considerable capacity to adjust its operating strategy to accommodate adverse market developments. As a result, the rating agency does not anticipate any intermediate-term circumstances that could necessitate a rating lower than Baa2/stable. Although it is possible that circumstances could emerge that would result in a lower rating level, Moody's believes that these circumstances (which include market or competitive developments beyond Ford's control and, to a lesser degree, a slowdown in Ford's pace of success in executing its revitalization plan) have a relatively low probability of occurring. Consequently, a Baa2 rating with a stable outlook reflects a prudent and reasonable intermediate-term floor for Ford's rating.

The confirmation of the Hertz rating, which is wholly-own by Ford, reflects the improving operating performance of its car and equipment rental operations, strong liquidity and equity base, and solid competitive position.

Since implementing its revitalization plan in early 2002, Ford has demonstrated increasing success at achieving the objectives and benchmarks that were identified by the rating agency as being necessary to maintain the Baa1 rating.

Cost Position: During 2003 Ford was able to reduce year-over-year costs by an impressive $4.6 billion. This reduction was driven by: $1.6 billion related to product quality and warranty improvements; $1.2 billion related to manufacturing and engineering; $1.4 billion in overhead; and $0.4 billion in product costs. This significantly exceeded Ford's publicly stated target of $1.0 billion in cost reductions, and it also surpassed Moody's own expectations. Despite these reductions, uncontrollable market factors offset much of the potential earnings benefit. More intense pricing, higher pension and healthcare expenses, and the decline in industry shipment levels in North America and Europe, all contributed to increased expenses that largely offset the sizable costs improvements. This illustrates one of the key risks facing Ford and a primary reason for the current negative outlook. Solid execution by Ford in controllable areas can be offset by adverse developments in market and competitive areas that are beyond the company's control.

Brand Image: Ford's progress in the area of improving its brand image include: 1) receiving Consumer Reports "recommend" designations for 17 of its models during 2003; 2) its ability to turn the Ford Focus from a low-quality product with a poor reputation into one of the most successful small-car in the US; and, 3) the steady progress it made in reducing warranty costs. Moody's believes that these accomplishments are all reliable indicators that Ford is making steady progress in the long-term initiative to strengthen its brand image.

Operating Performance and Cash Burn: During 2003 Ford's automotive operations modestly exceeded the breakeven benchmark by generating a $100 million PBT, with $1.7 billion in North American PBT being largely offset by a $1.1 billion loss in Europe. In addition, the automotive cash burn was approximately $2.0 billion, in line with the benchmark identified by Moody's during 2002. This cash burn figure represents gross cash flow less capital expenditures, dividend payments, working capital, and required pension payments; it excludes the $3.5 billion dividend received from Ford Credit.

Market Share: Moody's believes that sustaining market share is a key indicator of Ford's fundamental, long-term competitiveness. Ford's US share has fallen from 22.8% in 2001 to 21.3% in 2002 and 20.7% in 2003. Some degree of this share erosion can be attributed to the discontinuation of certain models, and to Ford's strategic decision to reduce its exposure to the daily rental market. The merits of these decisions, which are part of a broader revenue management strategy, are beginning to emerge as evidenced by improving revenue and profit per vehicle data. In addition, the company's share of the retail market, which excludes daily rental, appears to have stabilized.

As Moody's continues to monitor Ford, the success of the company's product strategy will become more important. Although the company's ability to reduce costs, improve efficiencies, and offset its relatively high pension and post-retirement healthcare expense burden will remain important areas of focus, the company is moving into the phase of its revitalization plan in which product will be critical. Ford has a relatively robust new product launch schedule for 2004 and 2005. The success of these launches and the company's ability to continue strengthening its brand image are critical to reaching its earnings and cash flow objectives for 2006. Consequently, product-related developments will take on a greater prominence in Moody's intermediate-term assessment of Ford. Important indicators of Ford's progress in this area will include: product assessments by Consumer Reports and J.D Power; recall levels; progress in holding down warranty expenses; success of launches of new products; and, consumer response to new products.

Other areas that will be important indicators of Ford's ability to stay on track to meet it's 2006 financial objectives, and that will be key areas of Moody's assessment of the company during 2004, include the following: 1) US market share should remain above 20% without the support of overly aggressive incentives; 2) the European restructuring must move the company toward a minimum break even performance; 3) PBT should approximate $1.5 billion for North American, $0.5 billion for the Premier Auto Group, $1.5 billion for total automotive operations, and $2.7 billion for Ford Credit; and, 5) automotive free cash generation (cash flow after capital expenditures, working capital, and dividend payments) should approach $1 billion.

Moody's expectation is that Ford will demonstrate a trend of solid overall progress in the areas on which the agency will focus. The rating agency does not anticipate that the data emerging in any of these areas will act as a trip-wire that results in the need for a rapid rating adjustment. Rather, the agency expects that trends in the areas that are controllable by Ford and reflective of its ability to execute the revitalization plan, as well as trends in less controllable market factors, will be a more meaningful indicator of the company's ability to sustain the Baa1 rating.

Ford Motor Company, headquartered in Dearborn, Michigan, is the world's second largest automobile manufacturer. Ford Motor Credit Company, also headquartered in Dearborn, Michigan, is the world's largest auto finance company.

New York

J. Bruce Clark

Senior Vice President

Corporate Finance Group

Moody's Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

New York

Robert Young

Senior Vice President

Financial Institutions Group

Moody's Investors Service

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653

J. Bruce Clark
Senior Vice President
Corporate Finance Group

Robert Young
Senior Vice President
Financial Institutions Group

No Related Data.
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