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Rating Action:

Moody's lowers rating of Ford to B3 and Ford Credit to B1

19 Sep 2006
Moody's lowers rating of Ford to B3 and Ford Credit to B1

Approximately $150 billion in debt affected

New York, September 19, 2006 -- Moody's Investors Service lowered the ratings of Ford Motor Company (corporate family rating and senior unsecured to B3 from B2) and Ford Motor Credit Company (senior unsecured to B1 from Ba3). Ford's Speculative Grade Liquidity rating has also been lowered to SGL-3 from SGL-1. The rating outlook is negative. These rating actions conclude a review for possible downgrade that was initiated on August 18, 2006.

The downgrade of Ford's long-term ratings reflects the intense pressure the company is facing as a result of the shift in consumer preference away from trucks and SUVs, and toward more fuel efficient vehicles. Although Ford's recently announced initiative to accelerate its Way Forward restructuring plan will attempt to address all of the key risks arising from this shift in demand, Moody's believes the company's operating performance and cash flow will be very weak through 2009 even if the execution of the plan is highly successful. Moreover, the rating agency anticipates that it will be challenging for the company to achieve all of the cost, revenue and pricing objectives contemplated by the plan. As Ford attempts the transition toward its new business model, it will be critical for the company to maintain strong liquidity in order to cover the considerable cash outflows it will face during 2006 and 2007.

Bruce Clark, senior vice president with Moody's said, "Ford's $23 billion in cash and $6 billion in committed bank lines give it a sizable cushion to cover near-term expenditures. However, the company's historically robust liquidity will be significantly reduced by these expenditures and could be further eroded by events such as a slowdown in the US economy, a spike in oil prices, an escalation in price discounting, or a UAW work action in 2007. Consequently, Ford may need to supplement these resources with asset sales and other strategic alternatives that are currently being investigated." Clark went on to note that, "Ford will also have to be consistently successful in executing each element of this plan without any major missteps. If it doesn't remain solidly on track for reestablishing a viable business model by 2009, additional restructurings would likely be necessary. But, by then the company will have run through much of its liquidity. Ford really has to get it right this time."

The lowering of the Speculative Grade Liquidity rating to SGL-3 reflects the sizable cash outflow that will result from operating losses and restructuring charges during the next twelve months, and the resulting erosion in Ford's liquidity position.

The negative outlook reflects the considerable challenges that Ford will face in executing the key elements of its restructuring plan during the next three years. It also acknowledges that factors beyond Ford's control could further undermine the company's financial performance despite any progress in executing the plan. These factors include a more competitive pricing environment, rising fuel prices, continued erosion in its domestic supplier base, or a slowdown in the US or European economies.

In downgrading Ford Credit's rating, Moody's maintained a two-notch rating differential from Ford's rating, reflecting Ford Credit's lower expected loss as well as its extensive business and financial ties with its parent. Moody's believes that creditors of Ford Credit would experience better asset recovery than would creditors of Ford in a default scenario. However, heightened uncertainty relating to Ford's deeper operating challenges and execution risks associated with its implementation of the Way Forward plan limit the possibility of a wider notching differential. Moody's vice president Mark Wasden said, "The negative operating trends at Ford have increased Ford Credit's stand-alone risk profile; of particular concern, Ford's longer turnaround horizon means that Ford Credit's opportunity to access unsecured funding will be constrained for a longer period of time, to the detriment of its liquidity profile." Wasden added that he believes that management is likely to pursue a number of strategies to bolster overall liquidity, including greater use of asset securitization. Higher levels of securitization, though, could increase asset recovery risks for unsecured creditors, in that their claims on Ford Credit's assets are structurally subordinated to those of secured creditors, which risk is included in the rating. The rating also incorporates Moody's expectation that Ford Credit's operating results are expected to be pressured by lower origination volumes and asset levels and narrower interest margins. These challenges notwithstanding, Moody's believes Ford Credit's stand-alone profile is modestly stronger than its current debt rating would indicate. "Ford's assertion that it intends to maintain control of Ford Credit means that Ford Credit's profile continues to be subject to the direction and oversight provided by Ford, which links Ford Credit's ratings with Ford's," said Wasden.

The major elements of Ford's accelerated restructuring plan include: reducing hourly employment levels by 25,000 to 30,000 workers and thereby achieving 100% manned capacity utilization by 2008.; lowering operating costs by $5 billion; increasing the product renewal rate in North American from an originally planned level of approximately 55% to 70% during the next two and a half years; and maintaining US market share at 14% to 15% despite the discontinuance of the high volume Taurus and Freestar lines.

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.

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

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

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