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Global Credit Research - 08 Oct 2010
Approximately $60 billion of debt affected.
New York, October 08, 2010 -- Moody's Investors Service raised the Corporate Family Rating (CFR)
of Ford Motor Company to Ba2 from B1. Other ratings that were raised
include Probability of Default to Ba2 from B1; senior secured credit
facility to Baa3 from Ba1; senior unsecured to Ba3 from B2;
and, preferred stock to B1 from B3. In a related action,
Moody's also raised the CFR and senior unsecured ratings of Ford
Motor Credit Company LLC, FCE Bank Plc, and Ford Credit Canada
Limited to Ba2 from Ba3. The rating outlook for Ford and Ford Credit
The Ford upgrade reflects a repositioning of the rating based on operating
performance which has significantly exceeded our expectations during the
first half of 2010. Moreover, we believe that the company
is well positioned to continue generating strong earnings and cash flow
through 2011, and to further strengthen its balance sheet.
Ford's ability to achieve this progress will be supported by the
much healthier industry fundamentals that have resulted from the extensive
restructuring of the US automotive sector during the past two years,
and by Ford's highly competitive product portfolio.
The upgrade of Ford Credit's ratings is based upon the upgrade of Ford's
ratings. Ford's improved credit profile has positive implications
for Ford Credit, in terms of its asset quality and profitability
measures, and its access to funding. Moody's noted
that the rating action also resulted in the elimination of the one-notch
rating differential that had previously existed between the Ford and Ford
Credit CFRs. In Moody's view, the risks associated
with Ford Credit's liquidity profile are a constraint on its rating
at the current rating level.
The sustainability of Ford's improving performance is supported
by the extensive restructuring that has taken place in the US auto sector.
Key elements of this restructuring have been the massive head-count
reductions that lowered fixed costs and eliminated excess capacity,
and the implementation of a new UAW contract that discontinued the JOBs
bank program and freed OEMs of retiree health care obligations.
This has resulted in a much healthier and commercially viable business
environment for domestic OEMs.
An additional factor contributing to the sustainability of Ford's
performance is the highly competitive position of its existing vehicle
portfolio, and the robustness of its new product pipeline.
During the first half of 2010, Ford's earning and cash flow
generation significantly exceeded our expectations, largely due
to the competitiveness of its product portfolio. In addition,
Ford has been at the forefront of embracing the more disciplined business
practices made possible by the restructuring of the US auto sector.
Moody's estimates that Ford's North American breakeven level
has declined by approximately 45% to 1.8 million units from
3.4 million units during the 2007 -2008 period. This
shift dimensions the significant degree of improvement in the company's
Bruce Clark, senior vice president with Moody's, said,
"It's important to realize how significantly the US industry
has been reshaped. The restructuring is enabling US OEMs to move
away from the dysfunctional business practices that plagued them for decades.
Domestic auto companies are now making much more rational decisions with
respect to production levels, pricing, and incentives."
Clark went on to say, " At the same time that the industry's
business practices have become more disciplined, Ford is coming
to market with an exceptionally strong product portfolio. The combination
of these two factors are supporting a business model for Ford that is
more robust, more profitable, and more sustainable than we
The Moody's analyst finally noted that, "We think that
the two-notch upgrade to Ba2 more appropriately positions Ford
relative to other automotive issuers."
Commenting on Ford's finance arm, Moody's senior analyst
Mark Wasden said "Ford Credit's reliance on confidence-sensitive
wholesale funding and high encumbered asset levels constrains their credit
strength, in relation to the credit improvements observed at Ford.
Furthermore, we expect that Ford Credit will eventually increase
its leverage, reducing on-balance sheet cash liquidity by
increasing dividends to Ford. These limiting factors, together
with Ford Credit's strategic importance to and implicit support
from Ford, will be important rating considerations in any future
rating actions for Ford Credit.
The stable outlook reflects expectations for continued progress during
the next two years. It also recognizes the challenges the company
may face through 2011 and beyond. These include the expiration
of the current UAW contract in September of 2011, and the risk that
Ford will be selected by the union for pattern bargaining due to non-strike
provisions in the contracts with General Motors and Chrysler. Ford
will also have to contend with the possibility of softer-than-expected
demand in the US and European markets; the need to expand its modest
position in the strategically important Asian markets; the growing
competitive threat from Korean manufacturers in the US; and,
the possibility of an erosion in the operating disciplines currently being
pursued by domestic OEMs.
Ford's SGL-2 Speculative Grade Liquidity rating reflects
the increasing size and predictability of the company's free cash
generation, its $22 billion in cash balances at June 30th,
and its $3 billion in availability under an $8 billion committed
credit facility at June 30th. These liquidity sources exceed $25
billion and provide strong coverage for any cash requirements that may
arise during the coming twelve months. The largest of these requirements
is to fund intra-month working capital requirements that Moody's
estimates to be approximately $7 to $8 billion. These
requirements reduce Ford's gross liquidity position of about $25
billion, to a net available liquidity position of approximately
$18 billion. Notwithstanding this very strong liquidity
position, Moody's notes the possibility that Ford may have
to contend with challenging UAW negotiations during late 2011, and
with the attendant risk that a strike could result in a considerable cash
burn. This contingent risk increases the need for Ford to maintain
an exceptionally strong liquidity position leading up to these negotiations.
The one-notch upgrade of the secured credit facility to Baa3 despite
the two-notch upgrade of the CFR, reflects the uncertainty
surrounding the priority in bankruptcy that might be experienced by Ford's
$12 billion (at December 2009) unfunded pension liability.
Due to the prospective nature of the two-notch upgrade to Ba2,
and the risks associated with UAW negotiations during 2011, a further
upgrade over the next twelve months is not likely.
A material delay or shortfall in achieving the operational or financial
progress anticipated in the Ba2 could result in pressure on the rating.
These expectations include continued generation of strong automotive cash
flow, further reductions in debt, and strong market acceptance
of newly-launched vehicles. The rating also anticipates
that Ford will remain on track to deliver credit metrics approximating
the following for fiscal 2011: EBIT/interest approaching 3.5x
(compared with 2.7x for the LTM through June 2010); debt/EBITDA
approximating 3.0x (4.1x for the LTM through June 2010);
retained cash flow/debt near 30% ( 21% for the LTM through
June 2010); and an EBITA margin of about 6% (5.2%
for the LTM through June 2010).
Should Ford Credit improve its funding mix to include a much higher percentage
of unsecured debt, thereby decreasing encumbered asset levels and
strengthening backup liquidity, the firm could improve its prospects
for future ratings upgrades, if Ford's ratings are also upgraded,
The principal methodologies used in rating Ford Motor Company were Global
Automotive Retailer Industry published in December 2009, and Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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of each rating category and the definition of default and recovery.
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 raises Corporate Family Ratings of Ford and Ford Credit to Ba2
250 Greenwich Street
New York, NY 10007
No Related Data.
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