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Global Credit Research - 28 Jan 2011
Approximately $60 Billion of Debt Affected
New York, January 28, 2011 -- Moody's Investors Service affirmed the ratings of Ford Motor Company
(Ford) and Ford Motor Credit Company (Ford Credit) and changed the rating
outlook to positive from stable. These ratings include for Ford:
Corporate Family Rating (CFR) and Probability of Default Rating (PDR)
- Ba2; senior unsecured - Ba3; secured credit
facility - Baa3; and Speculative Grade Liquidity rating -
SGL-2; and for Ford Credit: CFR and senior unsecured
Ford's positive outlook reflects Moody's expectation that
the company will make further progress in strengthening its credit metrics,
and that this progress could support a rating upgrade during the next
12 to 18 months. The improvement in Ford's financial profile
will be driven by the increasing competitiveness of its product portfolio
in the US, the growing likelihood that US automotive shipments will
rise from 11.6 million units in 2010 to approximately 13 million
units in 2011, and the impact of the $14.5 billion
debt reduction that Ford achieved during 2010. Much of this debt
reduction took place during the latter half of 2010, and a full-year
impact of significantly reduced interest expense will not be evident until
later in 2011.
Primary considerations in Ford Credit's outlook change to positive
are its strategic importance to Ford and Ford's explicit and implicit
support of its finance unit. "Ford is outpacing Ford Credit
in terms of improving its stand-alone credit strength, which
makes Ford's support of Ford Credit an increasingly prominent rating
consideration," said Moody's senior analyst Mark Wasden.
"Ford's ability to support Ford Credit, should it be
required, is strengthened as Ford's own operating prospects
improve," he added.
Ford's 2010 full-year automotive earnings increased by $7.2
billion. We expect the pace of improvement in earnings and cash
generation to moderate during 2011 due, in part, to headwinds
posed by rising commodity prices, new vehicle launch costs,
and weak automotive demand in Europe. Nevertheless, Moody's
anticipates that Ford will remain on track for strengthening its credit
profile. The most significant challenge facing Ford is the need
to negotiate a new UAW contract in September. The current contract
provided the US auto industry (including Ford, General Motors and
Chrysler) with concessions that were essential to reestablishing a viable
and competitive cost structure. These concessions included significant
headcount reductions, the elimination of the JOBS bank, the
creation of a two-tiered wage and benefit structure that will apply
to new hires, and the establishment of the UAW-administered
retiree healthcare program. The current contract expires in September.
Ford, unlike General Motors and Chrysler, does not have a
no-strike provision in its contract. Consequently,
Moody's believes Ford will likely be selected by the UAW as the
target for negotiation of a new contract that will then set the pattern
for key elements of contracts ultimately reached with GM and Chrysler.
Bruce Clark, senior vice president with Moody's said "Almost
everything that Ford needs in order to stay on track for a stronger credit
profile is in place: a robust US product portfolio, recovering
domestic demand, a significantly stronger balance sheet after debt
reduction actions, almost $28 billion in liquidity,
and operating efficiencies that are competitive with those of transplants.
The one thing that could derail them is a new UAW contract that undermines
the US industry's new-found cost competitiveness, or
that results in a prolonged or expensive strike."
Moody's base case forecast for Ford anticipates that a new UAW contract
will continue to incorporate some form of profit sharing that enables
workers to participate in the improving financial performance of the company.
We expect that such a program will not represent an overly burdensome
increase in Ford's cost structure and will not materially impact
the pace of improvement in the company's credit metrics.
If Ford achieves a new contract that preserves its operating flexibility
without a costly strike, and continues to strengthen its credit
metrics, the company's rating could be raised. Moody's
considered alternate scenarios including the risk that a strike could
temporarily disrupt Ford's operations and severely erode its liquidity
position, or that the new contract ultimately reached could include
more costly wages, benefits or work-rule provisions.
Moody's believes that the probability of a new contract substantially
reversing the competitive gains that have been achieved by the US automotive
industry is low. Nevertheless, the contract negotiations
are an important risk factor that will constrain any improvement in the
rating until constructively resolved.
Ford's SGL-2 Speculative Grade Liquidity rating recognizes
the company's considerable liquidity resources, which include
$20.5 billion in cash and approximately $7 billion
in committed credit facilities. The company's major liquidity
requirement is the approximately $7 billion to $8 billion
that we estimate it will need to fund intra-month working capital
requirements. Debt maturities are relatively modest at approximately
$2 billion during the coming twelve months. Ford's
liquidity sources of $27.7 billion exceed these requirements
by approximately $21 billion.
Ford must also contend with the potentially sizable cash burn and the
resulting liquidity requirement that might arise in the event of a prolonged
strike. Ford's total liquidity sources of $28 billion
should provide ample coverage of all requirements -- even those that
might result from a strike. Nevertheless, the critical nature
of the upcoming negotiations and the uncertainty surrounding the resolution
constrain the company's Speculative Grade Liquidity rating at SGL-2.
A successful resolution of the contract negotiations and a preservation
of Ford's sizable liquidity position would likely support an increase
in the Speculative Grade Liquidity rating to SGL-1.
Ford's progress on its operating initiatives is likely to lead Ford
Credit to experience higher origination volumes, better access to
funding, and steadier profitability metrics. However,
Ford Credit's continuing reliance on confidence-sensitive
wholesale funding and its high percentage of encumbered assets are constraints
on its stand-alone profile. Furthermore, Moody's
expects that Ford Credit will eventually increase its leverage,
reducing cash liquidity by increasing distributions to Ford. In
time, the negative consequences of this on the firm's credit
profile could be partially offset if Ford Credit successfully transitions
its funding mix to include a higher percentage of unsecured debt and unencumbered
assets, and further strengthens its liquidity profile.
The last rating action for Ford and Ford Credit was an upgrade of their
Corporate Family Rating to Ba2 on October 8, 2010.
The principal methodology used in rating Ford was Moody's Global Automotive
Manufacturer Methodology, published in December 2007. The
principal methodology used in rating Ford Credit is Analyzing the Credit
Risks of Finance Companies. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms ratings of Ford and Ford Credit; outlook positive
250 Greenwich Street
New York, NY 10007
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