MOODY'S LOWERS FORD'S RATING TO A3; CONFIRMS A2 LONG-TERM AND P-1 SHORT-TERM RATING OF FORD CREDIT; AND, LOWERS HERTZ'S RATING TO Baa1. OUTLOOK FOR ALL COMPANIES IS NEGATIVE.
Approximately $41.5 Billion of Debt Securities Affected.
New York, October 18, 2001 -- Moody's Investors Service lowered the senior debt rating of Ford Motor
Company to A3 from A2, and confirmed the A2 long-term and
Prime-1 short-term ratings of Ford Motor Credit.
The rating outlook for both companies is negative. Moody's also
lowered the long- and short-term ratings of Hertz Corporation
to Baa1 from A3 and to Prime-2 from Prime-1 respectively.
The rating outlook for Hertz is Negative. These rating actions
conclude a review for possible downgrade that was initiated on August
The downgrade of Ford's rating reflects the erosion in the company's longer-term
competitive position in North America. This erosion stems from
the increasingly competitive environment in the high-margin U.S.
SUV, light truck and minivan markets, which accounts for the
majority of Ford's earnings and cash flow. Moreover, the
returns generated by Ford's domestic car operations and its international
business have been chronically poor. In contrast, many of
its non-U.S. competitors have a more diversified
earnings stream: they earn acceptable returns on cars sold in the
U.S. where they have a younger and more affluent customer
base within the U.S. car market relative to Ford; they
are entering the lucrative U.S. truck, SUV and minivan
markets; and, they also enjoy solid profitability in their
This weakening in Ford's competitive position is occurring as the U.S.
automobile market is entering a cyclical downturn that could be exacerbated
by the aftermath of the September 11th terrorist attacks. This
will create a very challenging near-term environment for the company,
and will result in weak cash generation and debt protection measures through
2002. In response, Ford is undertaking various restructuring
initiatives intended to reduce employment levels and lower capacity.
It is also contemplating further initiatives that could reshape its operating
structure and strengthen the rebound in financial performance that would
accompany the eventual recovery in the U.S. automotive market.
Subsequent to past cyclical downturns, various restructuring and
product enhancement programs undertaken by Ford, in combination
with rising demand, have enabled it to enjoy a robust recovery in
earning, cash generation and debt protection measures. Ford's
ability to successfully lay the groundwork for an operational and financial
recovery when the U.S. market picks up will be critical
to sustaining the current rating level and to avoiding additional pressure
on the A3 rating.
Ford's negative outlook reflects the uncertainty surrounding the potential
depth and duration of the current downturn, the scope of the restructuring
efforts that might ultimately be implemented by the company, and
the degree to which its financial performance will improve when demand
recovers. We expect that over the coming quarters, the likely
severity of the U.S. downturn and the full scope of Ford's
restructuring efforts will become more clear. During this period,
Moody's will have an opportunity to more precisely assess the timing and
magnitude of the cash costs associated with the full range of any restructuring
efforts to be implemented by Ford, the impact that these efforts
will have on the company's fixed cost position and break-even levels,
and the degree to which the company can lay an effective foundation for
strengthening its financial performance beyond 2002. Important
considerations in assessing this foundation will include: 1) Ford's
ability to reduce domestic capacity, lower hourly wage and benefit
expenditures, consolidate platforms, and achieve additional
efficiencies in both its supplier and dealer networks; and,
2) the market share, pricing and industry-shipment assumptions
that are the back drop for Ford's future operating model.
Ford's liquidity position should afford it with adequate financial flexibility
as its operating model and the market environment take shape over the
near term. At the end of the third quarter Ford's manufacturing
operations had a sizable liquidity position based on cash, marketable
securities and VEBA balances of approximately $15 billion,
and the exceptionally long 28-year average life of its $12.1
billion in debt. Moreover, Ford's decisions to cut its dividend
and to pursue other near-term cash conservation efforts will be
constructive. Despite a potential underfunded pension liability
based on recent market performance, Moody's expects that Ford's
intermediate-term funding requirements for this liability should
be relatively modest. We also anticipate expenditures associated
with tire-related litigation will not represent a material drain
The confirmation of Ford Motor Credit Company's ratings are based on the
company's sound operating and financial position, the high quality
and liquidity of its assets, its importance to Ford, and the
relatively stronger position of the finance company's creditors vis-a-vis
the parent's. The finance subsidiary's ratings are closely linked
with Ford's given the interrelationship and business ties between the
two companies; yet Ford Credit remains positioned to operate as a
prudent finance company, with more stable business metrics through
economic cycles. Moody's believes that these finance company characteristics
present an incrementally better credit proposition for debt investors
than do the parent's, and the one-notch rating differential
reflects this conclusion.
Moody's believes that Ford Credit is a well-managed, technologically
sophisticated finance company. The company has operated with sound
levels of alternative liquidity to support both its debt-paying
ability and its ongoing business operations through market stresses,
and is well-positioned today. Short-term debt levels
have declined materially through 2001, with the finance company
making greater use of the long-term and short-term structured
finance markets. One consequence is a vastly increased level of
bank line coverage of outstanding commercial paper. Moody's also
noted that weakness in the auto market, and the economy generally,
will continue to be adverse credit factors: financng customer performance
is weakening, Ford's new car volumes and pricing are under pressure,
and the residual valuations on off-lease vehicles are under stress.
Yet Moody's believes that Ford Credit's underwriting, pricing and
credit reserve policies, as well as its asset-linked capital
standards, provide appropriate protection against market cyclicality.
Ford Credit's overall position is strongly influenced by its multifaceted
relationship with Ford. Ford's new vehicle sales volume directly
influences Ford Credit's origination volumes, and vehicle quality
and pricing influence lease residual valuations. The parent's marketing
policies influence the loan-versus-lease decision and financing
customer quality, with deep incentives attracting higher-quality
borrowers. Also, Ford is effectively an obligor to Ford Credit,
because Ford reimburses the credit company for any incentivized retail
loans back to market rate, over the term of the loans.
Nonetheless, Moody's believes that the position of Ford Credit's
debtholders is and will remain incrementally stronger than that of Ford's
creditors. The rating agency concluded that Ford Credit's debt
and equity constituents are both motivated to ensure that the company
maintains sufficiently prudent financial metrics, operating standards,
and asset quality measures to continue its operations through any range
of stresses. Ford Credit provides exceptional services to Ford
by ensuring that financing is available to its dealers and targeted retail
customers, even through economic stresses, and by serving
as a customer relations link. In this regard, the highly
liquid nature of prime auto finance loans, including a deep securitization
market, provides flexibility for the finance company to provide
these services, even through a difficult environment, if it
continues to operate prudently. For these same reasons, Moody's
believes that the current protocols of intercompany independence will
be broadly maintained. Moody's long-term debt ratings are
opinions about the likelihood of default as well as recovery or loss upon
default. In light of its expectations as to Ford Credit's ongoing
operations, the rating agency indicated that the superior recovery
prospects for the finance company creditors, although unlikely to
be tested, warrants a single notch rating differential from the
The downgrade of the Hertz rating and its negative outlook reflect the
erosion in the company's operations due to the severely weakened environment
for business and leisure travel in the U.S. This weakness
is the result of the general slow down in the U.S. economy,
and the additional burdens placed on the travel industry following the
terrorist attacks. The rating action also reflects the significant
operational and financial relationship between Hertz and Ford.
Hertz is the single largest buyer of Ford vehicles; Ford is Hertz's
largest supplier of fleet vehicles; it provides most of these vehicles
on a repurchase basis; and, Ford extends a $500 mil.
liquidity facility to Hertz. In addition, Ford has recently
increased its ownership of Hertz to 100% from 82%.
This relationship has provided a lift to Hertz's long-term and
short-term ratings. Consequently, the erosion in Ford's
credit quality diminishes the degree of ratings lift afforded to Hertz.
In taking this rating action on Ford and Ford Motor Credit Company Moody's
noted that it is continuing its review of the A2 long-term and
Prime-1 short-term ratings of General Motors Corporation
(GM) and General Motors Acceptance Corporation (GMAC) for possible downgrade.
GM faces many of the same competitive and cycilcal-downturn challenges
facing Ford. Moody's anticipates that it will shortly conclude
the review of GM's operational and competitive challenges, and resolve
issues relating to the possibility of GM and GMAC having different long-
and short-term ratings.
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.
Jay A. Siegel
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233
J. Bruce Clark
Senior Vice President
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233