MOODY'S LOWERS FORD'S RATINGS
Approximately $150 Billion of Debt Affected
New York, August 24, 2005 -- Moody's Investors Service lowered the ratings of Ford Motor Company
(Ford), senior unsecured to Ba1 from Baa3, and assigned a
Ba1 Corporate Family Rating and an SGL-1 speculative grade liquidity
rating. Moody's also lowered the ratings of Ford Motor Credit
Company (Ford Credit), senior unsecured to Baa3 from Baa2,
and short-term rating to Prime-3 from Prime-2.
The rating outlook for both companies is negative.
The downgrades reflect further erosion in the operating results and cash
flow generation of Ford in consideration of weakened market share and
continued challenges in addressing its uncompetitive cost structure in
North America. These factors are expected to result in a pretax
loss from automotive operations for 2005. Since improvement in
the company's cost structure can only be implemented over a period
of time, financial performance is expected to remain weak.
Ford Motor Company and supported entities: senior unsecured debt
to Ba1 from Baa3; trust preferred to Ba2 from Ba1; shelf registration
for senior unsecured debt to (P)Ba1 from (P)Baa3, and trust preferred
to (P)Ba2 from (P)Ba1; and VMIG-3 rating to SG.
Ford Motor Credit Company and supported entities: senior unsecured
debt to Baa3 from Baa2; shelf registration for senior unsecured debt
to (P)Baa3 from (P)Baa2, and subordinated debt to (P)Ba1 from (P)Baa3;
and, short-term rating to Prime-3 from Prime-2.
Ford Motor Company: corporate family rating, Ba1; and,
speculative grade liquidity rating, SGL-1.
Ford Motor Company: preferred stock, Ba2.
Moody's expects that Ford's automotive operations will consume
over $500 million of cash during 2005 following the payment of
its $700 million common dividend. This is prior to a number
of other significant cash flow items that are not reflective of the automotive
operation's ongoing performance, including receipt of dividends
from Ford Credit, and proceeds from the Hertz monetization,
and does not consider cash outflows associated with the Visteon restructuring,
and contributions to the pension and Voluntary Employees' Beneficiary
The SGL-1 speculative grade liquidity rating reflects Moody's
expectation that the company's $22 billion cash and short-term
VEBA position (June 30, 2005), in combination with proceeds
realized from the Hertz monetization, will provide ample coverage
of all anticipated cash requirements. The major requirements are
to fund the expected $500 million negative cash flow during 2005,
any further working capital requirements due to industry conditions,
approximately $1 billion of scheduled debt maturities and other
restructuring requirements. This liquidity has provided Ford with
an essential cushion as it has attempted to reconfigure its business model
to accommodate the increasingly challenging operating environment.
Ford's negative outlook recognizes that, in order to meet
the operational and competitive challenges it faces, and to achieve
the financial benchmarks necessary to support the Ba1 rating, the
company will have to successfully execute a number of strategic initiatives.
These initiatives include continuing to reduce its variable and fixed
costs including the cost burden associated with healthcare, stemming
the loss of market share in the US through successful launch of its new
products, and laying the groundwork to optimize its global manufacturing
and supply footprint. As the company undertakes these initiatives,
market factors beyond its control (higher incentives, rising fuel
prices, or an economic slowdown in Europe or the US) could contribute
to a more stressful operating environment. Any material erosion
in Ford's liquidity position would make its ratings more vulnerable
to the pressures that continue to confront its automotive operations.
The Ba1 rating anticipates that through 2006, Ford will: 1)
maintain US market share approximating 18.5%; 2) achieve
strong market acceptance and sustain healthy price realization for its
new mid-size cars; 3) exceed breakeven automotive profit before
tax; 4) generate automotive cash flow in excess of $500 million;
and 5) maintain gross liquidity (cash and short-term VEBA balances)
at or above $20 billion. Ford Credit, through its
continued support for the wholesale and retail financing requirements
of Ford and through the dividend payment to its parent ($4.4
billion during 2004), is also a critical positive factor in Moody's
assessment of the company. The Ba1 rating anticipates that during
2006 Ford's metrics, including the Ford Credit dividend and
using Moody's standard adjustments, will approximate the following:
EBITA margin exceeding 2%; interest coverage of 2 times,
and free cash flow to net debt greater than 10%.
Factors that could stabilize Ford's rating outlook include a rebuilding
of the company's US market share through strong consumer demand
for its products and a material and sustainable reduction in its cost
structure. Relief from healthcare costs paid to active and retired
hourly workers is imperative to achieve necessary cost repositioning.
Factors that would contribute to downward pressure on Ford's Ba1
rating include continuing loss of market share in the US which could result
from consumer movement away form trucks and SUVs, a further escalation
in price competition, a material reduction in the dividend stream
available from Ford Credit, or an erosion of Ford's liquidity.
The potential impact of any future restructuring initiatives would be
evaluated in the context of the amount and timing of any cash outflows,
Ford's ability to maintain adequate liquidity after providing the
funding, and the likelihood that the anticipated benefits would
be achieved in a reasonable timeframe.
The downgrade of Ford Credit's ratings reflects concerns that exist
at the parent level. Ford Credit's volumes, asset quality,
and earnings are influenced by Ford's product and marketing decisions,
which are currently under pressure to yield more favorable results,
as well as by its own origination and servicing strategies. Recent
quarters have demonstrated the virtue of Ford Credit's decision
to strengthen its underwriting, as credit losses have trended to
historically low levels, propelling higher earnings. Offsetting
this, Ford Credit's base of earning assets has declined on
lower origination levels which, combined with higher cost of funds,
has subdued results. This is a trend likely to be sustained in
future periods; however, in such circumstances, portfolio
liquidations are expected to continue to generate significant cash flow,
mitigating liquidity stresses associated with declining access to traditional
unsecured funding sources and enabling a relatively high dividend payout
to parent Ford.
Though most of Ford Credit's earning assets are securitizable,
certain of the company's assets, particularly those that are
more highly correlated with parent-level factors such as retail
leases and dealer finance receivables, are less readily securitized
and have traditionally been funded with unsecured debt. Declining
access to unsecured debt may become a limiting factor to the company's
scale in future periods. Nevertheless, Moody's expects
Ford Credit will maintain the necessary flexibility to manage foreseeable
near-term liquidity stresses and, in addition, will
be disciplined regarding maintaining acceptable capital levels.
Leverage measures that increase from current levels could impair the company's
financial flexibility and result in negative ratings pressure.
Ford Credit's one-notch differential from Ford's rating
is based on Moody's view that, in a default scenario,
Ford Credit's assets would likely provide superior asset recovery
to unsecured creditors compared to the assets of Ford. Moody's
believes that Ford and Ford Credit are mutually motivated to preserve
Ford Credit's franchise value, by maintaining the corporate
separateness of its various functions, controls, and leadership,
thereby offering some protection of its assets from potential substantive
consolidation in a bankruptcy filing by Ford. Any change in Moody's
view regarding the magnitude of the notching differential would likely
relate to actions Ford might pursue to decrease Ford Credit's probability
of default, by modifying ownership or governance structures.
The potential for additional notching is probably limited to one notch,
due to the significant ties between the companies.
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.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Mark L. Wasden
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service