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16 Jan 2002
MOODY'S LOWERS RATINGS OF FORD (SR TO Baa1), FMCC (SR TO A3 AND CP TO P-2), AND HERTZ (SR. TO Baa2). OUTLOOK IS NEGATIVE.
Approximately $150 Billion of Debt Securities Affected
New York, January 16, 2002 -- Moody's Investors Service lowered the credit ratings of Ford Motor Company
and related entities. The rating actions included Ford Motor Company
- senior debt to Baa1 from A3; Ford Motor Credit Company (FMCC)
senior debt to A3 from A2, and commercial paper to Prime-2
from Prime-1; and Hertz Corporation - senior debt to
Baa2 from Baa1. Hertz's Prime-2 commercial paper rating
is confirmed at the current level. The rating outlook for all of
the affected companies is negative.
The downgrade of Ford's ratings reflects Moody's expectation that the
time frame for re-establishing a competitive operating model in
the U.S. and generating appropriate levels of earnings and
cash flow will be protracted, despite the implementation of its
revitalization plan. The majority of the benefits anticipated from
the plan will not be realized until the 2004/2005 time frame. Moreover,
the intensely competitive conditions in the U.S. automotive
market could limit the degree of improvement that is ultimately achieved.
Moody's expects that these competitive conditions, in combination
with the protracted nature of the revitalization plan, will result
in a significant cash burn during 2002 and 2003, and that debt protection
measures will be very weak for the current rating level. The negative
outlook reflects Ford's weak positioning within the Baa1 rating category,
as well as the considerable challenges it will face in implementing the
various components of the plan, and adequately strengthening its
operating performance. In order to maintain the Baa1 rating,
Ford must demonstrate steady progress in a number of areas that Moody's
will closely monitor with the assistance of the company through the intermediate-term.
These areas include: maintaining domestic market share above 22%,
managing the intermediate-term cash burn rate within forecasted
parameters, achieving the planned asset dispositions on a timely
basis, reestablishing underwriting standards within FMCC that lessen
risk within this subsidiary, and hitting the targeted level of savings
and operational improvements that are anticipated from capacity reduction
initiatives, reductions in material costs, and long-term
revenue enhancement programs.
Moody's believes that the Ford plan has constructive elements that will
help to support its credit quality over the longer-term.
The operational components of the plan include: closing 5 plants,
eliminating 15,000 hourly and 5,000 salaried workers,
reducing U.S. capacity from 5.7 million units to
4.8 million units, working with suppliers to reduce material
costs, discontinuing four poorly performing car models, and
implementing a number of longer-term revenue enhancement initiatives.
The company expects that these components of the plan will reduce costs
by $2.0 billion during 2002, and will help increase
total profits by $9 billion by mid-decade. However,
the rating agency expects that the pace of incremental savings will taper
off during 2003, and will begin to ramp up in late 2004 and throughout
2005. As a result, cash from operations will likely be significantly
negative during 2002 and 2003.
The financial components of the plan are intended to bolster Ford's near-term
liquidity during this period of sizable cash burn. These components
include: reducing the common dividend to $700 million versus
an annual rate of about $2.2 billion during 2000,
generating $1 billion from asset dispositions, and raising
$3 billion from the sale of convertible trust preferred securities.
Although these preferred securities are debt-like in nature,
their long-dated maturity will support intermediate-term
liquidity. At September 30, 2001, the automotive operations
cash and VEBA position exceeded $15 billion, and its $13
billion in debt has a lengthy average life of 28 years. This liquidity
position will be further enhanced by the financial components of the revitalization
plan and should provide Ford with ample liquidity during the 2002 and
2003 periods during which operations will consume large amounts of cash.
Notwithstanding this adequate intermediate-term liquidity,
it will remain critical for the company to make steady progress in strengthening
its operating fundamentals.
The downgrade of FMCC's short and long-term ratings reflect the
close linkage with Ford's ratings given the interrelationship and business
ties between the two firms, as well as heightened credit concern
regarding FMCC. The one notch rating differential on the firm's
long-term debt was maintained because Moody's believes that the
primary tenets underlying the original differentiation remain intact (please
see Special Comment entitled "Analysis of Rating Linkages Between Manufacturers
and Their Captive Finance Subsidiaries" dated November 2001).
FMCC's asset quality suffered in 2001 with a significant amount of the
issues concentrated in the fourth quarter. This appears to have
been a function of both frequency and severity of default. Frequency
of default increased due to FMCC's portfolio being particularly susceptible
to macroeconomic factors. Severity issues were faced at FMCC and
across the industry due to a decline in used car values.
FMCC's asset quality is likely to remain under pressure in 2002.
The company has prepared for this with a substantial increase in reserves
in December 2001. Additionally, FMCC has undertaken a series
of initiatives to better control and predict its portfolio's behavior,
and its origination scope and underwriting standards have been tightened.
However, the macroeconomic environment will be critical to maintaining
losses within the anticipated range due to the portfolio effect -
it will take time for existing contracts that were written in a different
operating environment to mature and work their way out of FMCC's portfolio.
Ford suspended FMCC's fourth quarter 2001 dividend and contributed $700
million in equity to FMCC in January 2002. Although this is positive,
in Moody's view, FMCC's leverage remains aggressive and has become
an increased credit concern. FMCC's portfolio quality has exhibited
unexpected deterioration, and may continue to be under pressure
given the macroeconomic environment. Additionally, Moody's
believes that FMCC now exhibits higher risk, as reflected in its
ratings, and the firm generates increased market scrutiny and sensitivity.
The downgrade and negative outlook for Hertz 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 million
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.
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
Moody's Investors Service
J. Bruce Clark
Senior Vice President
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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