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Rating Action:

Moody's downgrades Ford ratings to Baa3; outlook is negative

29 Aug 2018

New York, August 29, 2018 -- Moody's Investors Service ("Moody's") downgraded the senior unsecured rating of Ford Motor Company (Ford), and its supported subsidiaries and affiliates to Baa3 from Baa2. The outlook is negative.

RATINGS RATIONALE

The downgrade of Ford's rating reflects the erosion in the company's global business position and the challenges it will face implementing its Fitness Redesign program. Negative developments impacting Ford include: softening margins in North America driven by higher costs; reversal of its Chinese operations in which EBIT has fallen from a $70 million profit in the first half of 2017, to a $633 million loss in the first half of 2018; strain in the South American operations that lost $750 million in 2017; and, continued losses in Europe which are likely to worsen because of Brexit related costs from Ford's UK operations. These pressures have contributed to an erosion in Ford's key credit metrics between 2016 and the twelve months ending June 2018, including: EBITA margin falling from 4.2% to 2.0%; debt/EBITDA rising from 2.6x to 3.3x; and EBITA/interest declining from 4.5x to 1.8x.

Under the Fitness program, Ford will reassess all parts of its business portfolio with the goal of restructuring, contracting or exiting businesses that will not be able to generate adequate returns. Restructuring initiatives could entail $11 billion in charges with $7 billion in related cash expenditures over the next 3 to 5 years. For example, the company's decision to wind-down its car business in North America, which we viewed as credit-positive, reflects its willingness to make aggressively-disciplined capital allocation decisions.

Despite these challenges, Ford's Baa3 rating is supported by several factors. The company has a highly competitive and profitable position in North America; the Fitness program is targeting the major areas of weakness in the company's business portfolio; the program is being implemented while global auto markets are reasonably healthy; and, the company has demonstrated the ability to successfully restructure operations in the past. In addition, Ford has a strong liquidity profile consisting of $25 billion in cash, which is well in excess of funded debt, and $11 billion in committed credit facilities. This provides flexibility to implement the Fitness program and meet approximately $4 billion in automotive debt maturities over the coming twelve months.

The Fitness program is a necessity, but it will take several years for material financial and operating benefits of the program to be realized. Success could be challenged by having to address the serious performance problems in multiple business units simultaneously. At the same time, Ford will have to continue investing in the areas critical for the future of the auto industry. These areas include alternative propulsion, autonomous driving, ride sharing and connectivity. Investments will also have to be made in meeting the carbon emissions regulations in a number of regional markets. Of particular near-term concern is China, where Ford must rapidly renew its product lineup and rebuild relationships with dealers in order to regain lost market share. As it pursues the revitalization in China, Ford will have to contend with an environment in which domestic Chinese producers are being more competitive, pricing pressure is growing, and non-Chinese manufacturers are attempting to expand their presence.

Ford's negative outlook recognizes the significant challenges of effectively executing the full scope of the Fitness program, and the extended time period over which material benefits might be achieved. In addition, the considerable financial and managerial resources devoted to the Fitness program will reduce Ford's ability to contend with any unexpected cyclical downturn.

The ratings could be downgraded absent clear progress in pursuing the Fitness initiatives by early to mid-2019, with evidence that the company is on a strong trajectory for recovery. The rating could also be lowered if Ford is unable to address operational inefficiencies in each of its major regions, while at the same time showing progress under the Fitness program's objective to generate adequate returns across all aspects of its automotive business. Evidence of such improvement could be reflected in the following areas: 1) North America: achieving an EBIT margin above 8%, maintaining market share of at least 14.5%, and lowering the breakeven level; 2) China: successfully launching new products that help grow market share, improve dealer relationships and restore historic levels of profitability; and 3) consolidated automotive operations: making steady progress toward restoring positive free cash flow.

The prospects for an upgrade of Ford's ratings through 2020 are very modest. However, if the company is able to successfully execute the Fitness program, an upgrade, over the long-term, could be possible. This would require achieving a 10% EBIT margin in North America, and re-establishing its former competitiveness and profitability in China. Metrics that could support an upgrade include: a consolidated automotive EBIT margin approaching the high single digits, and sustainable above 8%; debt/EBITDA below 2.75x, and EBITA/interest 5.0x.

The following rating actions were taken:

Downgrades:

..Issuer: Ford Capital B.V.

....Senior Unsecured Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: Ford Holdings, Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

....Senior Unsecured Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: Ford Motor Company

....Senior Unsecured Bank Credit Facility, Downgraded to Baa3 from Baa2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: Ford Capital B.V.

....Outlook, Remains Negative

..Issuer: Ford Holdings, Inc.

....Outlook, Remains Negative

..Issuer: Ford Motor Company

....Outlook, Remains Negative

The methodologies used in these ratings were Automobile Manufacturer Industry published in June 2017, and Captive Finance Subsidiaries of Nonfinancial Corporations published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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