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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;
3) Moody's expectation that Ford is continuing to lay the groundwork
for much stronger operating performance and cash generation during 2005
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
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
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
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.
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