MOODY'S LOWERS FORD'S RATINGS
Approximately $130 Billion of Debt Affected
New York, January 11, 2006 -- Moody's Investors Service lowered the ratings of Ford Motor Company
(Corporate Family and long-term to Ba3 from Ba1) and Ford Motor
Credit Company (long-term to Ba2 from Baa3, and short-term
to Not Prime from Prime-3). Ford's SGL-1 Speculative
Grade Liquidity rating is affirmed. The rating outlook for Ford
and Ford Credit is negative. These rating actions conclude a review
for possible downgrade that was initiated on November 22, 2005.
Moody's said that the Ford downgrade incorporates the view that
the company's financial and competitive position will remain under
considerable stress through 2007 despite the potential longer-term
benefits that may result from its pending restructuring initiatives.
The rating agency said that Ford's performance, relative to
the key drivers of credit quality described in Moody's Rating Methodology
for the Global Automotive Industry, is likely to result in the company's
risk profile remaining at the lower end of the 16-company automotive
peer group rated by Moody's. Moreover, as Ford attempts
to reestablish and strengthen its position in the benchmark areas described
in the methodology, Moody's believes that leading Asian and
European rivals will continue to make notable progress in these same areas,
thereby further increasing the competitive and operating challenges faced
by Ford. Areas in which Ford's performance will likely remain
weak relative to the methodology benchmarks include: 1) sustaining
profitable share in core markets; 2) building a competitive cost
structure based on efficient capacity utilization, flexible labor
costs, and a stable supplier base; 3) generating meaningful
levels of free cash flow; and, 4) achieving competitive returns
on investment. Although Ford's restructuring plan will likely
address each of these areas, material improvement in operating and
financial performance is likely to take several years to achieve.
Consequently, Ford's credit metrics will likely remain weak
The Ford Credit downgrade reflects the continuing close operational and
financial ties with Ford, and the fact that challenges faced by
Ford could have a negative impact on the operations of the finance subsidiary.
Nevertheless, the downgrade continues to reflect a one-notch
differential from Ford's rating, based upon Moody's
view that, in a default scenario, Ford Credit creditors are
likely to experience better asset recovery than are Ford creditors.
The negative outlook reflects Moody's view that at the Ba3 rating
level, Ford remains weakly positioned relative to the key automotive
methodology rating criteria. Consequently, the company's
rating could come under further pressure during the next six to twelve
months as a result of a number of near-term events or developments.
These include: an acceleration in the shift in consumer preference
away from trucks and SUVs; any further erosion in Ford's US
share position; or an increase in incentives. In addition,
constructive negotiations with the UAW in order to further reduce health
care costs and lower employment levels will be critical to the success
of Ford's restructuring program and its ability to establish a more
competitive cost structure. The outcome of the current negotiations
between the UAW, Delphi and GM could be an important indicator of
the environment in which Ford may have to seek important labor concessions.
Moody's said that it expects Ford's soon-to-be-announced
North American restructuring initiative to establish aggressive long-term
objectives for reducing material costs, eliminating excess capacity,
consolidating platforms, accelerating new product introductions,
and expanding the global profile of its manufacturing and supply footprint.
Moreover, as the company initiates this program it will benefit
from a strong liquidity position characterized by cash and equivalents
of approximately $25 billion (including proceeds from the Hertz
sale), over $6 billion in available committed bank credit
facilities, and a 24-year average maturity for its $18
billion in debt (less than $1.5 billion matures during the
next four years). Finally, Ford is benefiting from strong
consumer acceptance of it new mid-size and full-size automobiles,
which could help to moderate some of the pressure faced in the truck and
Despite these strengths, Moody's said that Ford continues
to face formidable challenges, the most significant of which will
be stabilizing its US share position at 18% or higher. In
addition, Ford's profitability remains highly dependent on
the truck and SUV segments that are experiencing both a long-term
decline in shipment levels as well as a contraction in profit margins.
As Ford's share position in the US has fallen from 22.8%
in 2001 to 18.3% in 2005, Moody's believes that
its capacity utilization has also declined to about 80%.
This erosion has contributed to two significant cost containment challenges
that will likely require a degree of accommodation from the UAW as part
of the 2007 contract renegotiation. First, lower capacity
utilization has severely reduced Ford's ability to cover the large
fixed cost burden associated with its high health care expenses.
As a result, Ford must achieve health care cost reductions beyond
the recently agreed upon cuts in UAW retiree medical benefits.
Reductions may be needed for the active UAW work force. Second,
as Ford attempts to reduce capacity it will likely have to implement a
large employee separation payment program with the concurrence of the
UAW. It is uncertain whether the company will be able to achieve
the concessions necessary from the UAW to begin establishing a more globally
competitive labor cost structure in its US operations.
Moody's said that Ford's performance relative to important
credit metrics identified in the automotive methodology have remained
near the bottom of the automotive peer group largely due to losses in
market share, capacity underutilization, and high fixed labor
costs. For fiscal 2005 the operating margin of the industrial business
(excluding any earnings or dividend contribution from Ford Credit) will
be negative after having been below 1% for the previous two years,
EBITA/average assets (including Ford Credit dividends) will be less than
3%, interest coverage (including Ford Credit dividends) will
be less than 2 times, and the ratio of free cash flow to debt will
remain well below 10%. These already-weak metrics
(calculated using Moody's standard adjustments) will remain under
considerable pressure and are unlikely to improve during 2006 due to continued
declines in the shipment levels and the profit margins within the truck
and SUV market.
As noted in Moody's automotive methodology, liquidity is a
key rating factor. In the case of Ford, exceptional liquidity
continues to act as a mitigant against weak credit metrics, and
also affords the company a critical financial cushion as it attempts to
implement its restructuring initiatives.
Moody's noted that there are a number of factors beyond Ford's
control which could result in further pressure on the rating. These
factors include: an erosion in the UAW labor relations environment
at Delphi; greater consumer resistance to products in the truck and
SUV segments; or an acceleration in negative price realization.
Moody's said that other key drivers of Ford's rating will
relate primarily to the company's initiatives that could help to
strengthen its business or financial position relative to the methodology
benchmarks. Successfully implementing these initiatives and remaining
on track for achieving the intended objectives could contribute to a stabilization
of the rating. Conversely, a lack of success in any of these
areas would contribute to further pressure on the rating. The key
drivers that Moody's will focus on include Ford's ability
to: 1) sustain US market share at 18% or higher; 2)
maintain liquidity above $23 billion; 3) achieve strong market
acceptance of new products; 4) avoid significantly increased warranty
expense or product recall activity; and, 5) achieve the various
cost reduction and operational targets that will be part of the restructuring
plan. Ford is expected to announce its restructuring program on
January 23rd, and to publicly disclose details of the plan.
Moody's anticipates that upon the disclosure of these details,
the rating agency will publicly incorporate certain elements of the of
the program into the list of key rating drivers that it will monitor for
the purpose of determining whether the company's position in the
Ba3 rating category is improving or deteriorating.
Moody's said that the challenges Ford faces in its auto operations
could negatively impact conditions at Ford Credit, due to the financial
and operational ties between the two firms. Under greatest pressure
is Ford Credit's liquidity position, due to an unfavorable
pricing environment for new unsecured debt issuance. Ford Credit
is increasingly turning to securitization and other forms of financing
to provide funds necessary to support origination activity. Ford
Credit continues to enjoy good receptivity among securitization investors
and is expanding its reach in that arena. But Moody's believes
Ford Credit's overall unused committed funding capacity may decline
in 2006, potentially constraining its future financial flexibility.
Ford Credit's shrinking base of earning assets helps to mitigate
liquidity stresses, as portfolio runoff generates strong cash flows
to support operating activities and dividends to the parent. The
firm has additional liquidity insurance in the form of sizeable available
cash balances of $19 billion at the end of the third quarter of
2005. Moody's believes Ford Credit has sufficient resources
to manage through near-term liquidity stresses and that it will
be disciplined in maintaining acceptable capital levels.
Ford Credit's margins are also under pressure due to higher borrowing
costs, a mix shift toward higher quality but lower yielding loans,
and a competitive pricing environment for new loan and lease originations.
Profitability has been sustained by improvements in credit quality that
have provided Ford Credit the opportunity to significantly reduce loss
provisions, but any further improvements in credit quality are likely
to be quite modest compared to recent quarters. Ford Credit remains
adequately reserved, but any meaningful pressure on credit quality
caused by adverse economic news, a shift toward higher levels of
riskier loan originations, or worsening used car values --
which could potentially be tied to parent issues -- could
require higher provisioning, adding to pressure on profitability.
Ford Credit has taken steps to adjust operating costs in proportion to
declines in business scale, but this could become more challenging
going forward and could further stress profit ratios. Deterioration
of profitability or asset quality could have negative implications for
Ford Credit's intrinsic credit profile.
Ford Motor Company, headquartered in Dearborn, Michigan,
is the world's third largest automobile manufacturer. Ford Motor
Credit Company, also headquartered in Dearborn, Michigan,
is the world's largest auto finance company.
Mark L. Wasden
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service