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Announcement:

Moody's affirms ratings of Ford and Ford Credit; outlook positive

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 - Ba2.

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.

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms ratings of Ford and Ford Credit; outlook positive
No Related Data.
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