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Rating Action:

MOODY'S CONFIRMS: Baa1 RATING OF FORD; A3 AND P-2 RATINGS OF FORD CREDIT; AND, Baa2 AND P-2 RATINGS OF HERTZ; OUTLOOK FOR ALL REMAINS NEGATIVE

14 Nov 2003
MOODY'S CONFIRMS: Baa1 RATING OF FORD; A3 AND P-2 RATINGS OF FORD CREDIT; AND, Baa2 AND P-2 RATINGS OF HERTZ; OUTLOOK FOR ALL REMAINS NEGATIVE

Approximately $160 Billion of Debt Affected

New York, November 14, 2003 -- Moody's Investors Service confirmed the Baa1 long-term rating of Ford Motor Company, and the A3 long-term and Prime-2 short term ratings of Ford Motor Credit Company (FMCC). Moody's also confirmed the Baa2 long-term and Prime-2 ratings of Hertz Corporation. The Outlook for all of the long-term ratings is negative. The confirmation of the Ford rating reflects:

1) The progress that Ford has made in achieving many of the financial and operational objectives that were contained in its January 2002 revitalization plan, and that were also identified by Moody's as key benchmarks in the rating agency's ongoing assessment of the company;

2) Ford's ability to maintain exceptional liquidity during the revitalization process, as evidenced by its $26.9 billion in cash and marketable securities (at September 2003), compared with $20.0 billion in debt that has an average maturity exceeding 25 years; and,

3) Moody's expectation that Ford is continuing to lay the groundwork for much stronger operating performance and cash generation during 2005 and beyond.

Despite these positive factors, Moody's believes that Ford will continue to face formidable challenges that could make it difficult for the company to sustain the current rating. These challenges include: maintaining the positive momentum in all areas in which it has made progress since January 2002; achieving adequate profitability, returns and debt protection measures in a US market characterized by continuing high incentives; quickly restructuring its European operations to achieve adequate profitability; significantly enhancing domestic automotive revenue and earnings prospects for 2005 by achieving successful launches and solid consumer acceptance for the aggressive new product introduction program that is being initiated with the 2nd half 2003 release of the F-150 and will extend through the end of 2004; contending with OPEB and pension legacy costs that are much more burdensome than those of its principal Asian and European competitors; managing the operational and financial burdens that might be posed by the difficulties faced by Ford's largest supplier -- Visteon; and, strengthening the asset quality, moderating the high leverage, and preserving the strong liquidity of Ford Credit. Additionally, given the likelihood that overcapacity and intense pricing competition will remain key characteristics of the global automotive industry, a major long-term challenge confronting Ford will be the need to establish a business model that enables it to generate adequate returns on investment and capital.

During the coming quarters Moody's will closely monitor a number of factors relating to Ford's ability to address these challenges and to sustain the Baa1 rating. These factors include: any update by Ford of its intermediate-term strategic and operating plan, and of its financial forecasts; the degree of consumer acceptance as well as the profit potential of newly-introduced models; the company's full-year results for 2003; and, the outlook for the US economy and consumer sentiment. It is important to note that as Ford has implemented its revitalization program during the past 18 months, its financial flexibility has been consistently supported by a gross liquidity position exceeding $25 billion. This extraordinary liquidity, in combination with the ongoing evidence of Ford's progress in achieving the operational goals of the revitalization plan, has played a key role in the company's ability remain at the Baa1 level despite weak operating performance and a very challenged competitive position. Nevertheless, the coming quarters will likely represent an important juncture for determining the longer-term appropriateness and sustainability of the Baa1 rating.

The negative outlook reflects the uncertainty that Ford will be able to demonstrate that its revitalization strategy will restore a sufficiently competitive position in the US and European markets, and the uncertainty that this competitive position will result in adequately robust and sustainable generation of free cash flow from automotive operations by 2005. The rating agency views automotive free cash flow as funds generated after working capital, capital expenditures, dividend payments, and required pension contributions, but before any dividends received from FMCC, any tax refunds, and any other extraordinary or nonrecurring items. For 2003, Moody's currently expects an automotive cash burn that will be lower than the $2.0 billion threshold the agency had identified during 2002. To support the Baa1 rating, the automotive operations would have to be close to self funding during 2004 - meaning that free cash flow will be at a break even level; by 2005 these operations would have to have a competitive position and operating model that can support free cash flow comfortably in excess of $2 billion during up phases in the automotive cycle; this operating model would also have to greatly minimize the potential degree of erosion in cash flow during down phases of the cycle.

Following the announcement of its revitalization plan in early 2002, Ford has made notable progress in a number of key areas. Total automotive costs will have been reduced by approximately $3.0 billion during 2003. The major contributors to this improvement are cost reductions relating to material purchases and significantly lower cash expenditures relating to warranty repairs. This $3.0 billion level of overall automotive cost reductions considerably exceeds both Ford's and Moody's original expectations. Moody's also believes that Ford has made progress in improving its product quality and brand image in the US. Evidence of this progress includes Ford's lower cash outlays for warranty coverage and its having 18 models on Consumer Report's recently-released 2004 "Recommended Buy" list. Ford's progress in these areas has enabled it to achieve a modest increase in share in the critical retail market (from 14.4% to 14.6%) between 2002 and 2003. This retail share measure excludes Ford's loss in share associated with the unprofitable fleet market, and the decline associated with models that are being discontinued. Ford's overall share of the US market has eroded from 22.8% in 2001, to 21.1% in 2002, and to 20.8% in 2003. This current level is below the 22% benchmark identified by Moody's during the past 18 months, and represents a steady decline from 25.3% in 1998. It is critical that Ford stem this erosion. Nevertheless, Moody's near-term concern over Ford's decline in overall share is modestly tempered by its gains in the retail market, and by the positive data relating to its brand image and product quality.

Financially, Ford's automotive group is on track to meet its original goal and Moody's expectation of break even operating performance during 2003. In addition, the rate of automotive cash burn (after working capital, capex, dividends and required pension contributions, but before tax refunds and dividends from Ford Credit) will be notably less than the $2 billion target sited by Moody's in early 2002. Moreover, free cash flow (including tax refunds and the Ford Credit dividend) will likely exceed $3 billion for 2003.

During September 2003, Ford successfully renegotiated its labor contract with the UAW. Moody's believes that the terms of this contract are constructive. These terms will enable Ford to close the four facilities it had identified for shutdown as part of the revitalization program; they provide for greater work rule flexibility; and, they also provide for a rate of increase in wages and benefits that is lower than the rate awarded during the 1998 contract.

Finally, Ford is on track to proceed with an aggressive new product rollout program during 2004. This initiative was identified and anticipated at the outset of the revitalization program, and its success in boosting revenues and earnings during 2005 will be critical to Ford's achieving its original competitive and financial objectives.

Ford Credit has produced sizeable earnings in 2003 as it has required lower loss provisioning than in prior periods. We do note that the company has properly maintained its bad debt reserves at stable levels as it continues to work through a period of challenging conditions in its portfolio. Ford Credit's asset quality has been disappointing, with scant improvement despite a number of initiatives on the part of management since its change in strategy two years ago. This has been due to continued stress in the economy which has kept both frequency of default and severity of loss relatively high. Moody's will continue to carefully monitor progress in the company's asset quality, and will attempt to segregate the weakness caused by external economic factors from the potential benefits of management's emphasis on improving portfolio quality. Ford Credit has also established a solid liquidity position, with a substantial cash position, bank lines, and asset-backed market access. Additionally, the company potentially benefits from a portfolio that runs off faster than its debt, thus providing a further source of liquidity. Moody's also notes that it views Ford Credit effective leverage position as being high.

Notwithstanding Ford's progress during the past year, many aspects of the company's competitive position and operating performance are likely to remain weak and unsupportive of the current rating level through 2004. Within the context of Ford's ability to maintain the Baa1 rating, we continue to view 2004 as a year of transition and broad-based improvement, and 2005 as a year in which the company's three-year-old revitalization program will begin yielding strong, yet still-improving performance in virtually all key areas. Moody's will focus primarily on the potential for generation of strong and sustainable free cash flow.

Should a downward rating adjustment become necessary, it is unlikely that such a movement would be more than one rating grade. However, recognizing that there may be some possibility that following a one-notch downgrade the rating outlook could be negative, Moody's nevertheless expects that Ford's rating will remain within the investment grade category during the intermediate term despite stress that might result from intensifying competitive pressure, cyclical downturns in any markets, or diminished pace of success in implementing its revitalization and restructuring programs. Notwithstanding any potential reduction in Ford's rating, Moody's also expects that the one-notch rating differential between Ford and Ford Credit will be maintained, due to the superior recovery value that would likely be afforded to the finance company's creditors, and due to the superior liquidity and funding access that the ABS market affords to Ford Credit.

Moody's also notes that a potential lowering of Ford's rating could result in a one-notch reduction in the Baa2 rating of Hertz Corporation. However, such a reduction is not certain. In addition, the current competitive position, operating model and financial performance of Hertz, if sustained into the future, would likely support a Baa3 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.

Hertz Corporation, headquartered in Park Ridge, New Jersey, is the world's largest rent-a-car company and is a leader in the rental and lease of construction and material handling equipment.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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