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02 Nov 2009
Approximately $25 billion of debt affected
New York, November 02, 2009 -- Moody's Investors Service raised the Corporate Family Rating (CFR)
of Ford Motor Company (Ford) to B3 from Caa1. Other ratings that
were raised include: Probability of Default Rating (PDR) to B3 from
Caa3; secured credit facility to Ba3 from B1; unsecured debt
to Caa1 from Caa2; and trust preferred stock to Caa2 from Caa3.
Ford's Speculative Grade Liquidity rating remains at SGL-3,
indicating adequate liquidity for the coming 18 months. The rating
outlook is stable.
Moody's also raised the senior long-term rating of Ford's
finance subsidiary, Ford Motor Credit Company LLC, to B3 from
Caa1 and placed the firm's ratings on review for further possible
upgrade (see separate press release).
The upgrade reflects the substantial progress Ford continues to make in
strengthening its product portfolio and cost structure while maintaining
a very substantial cash position on its balance sheet. As a result
of this progress, Moody's expects that the company will remain
solidly on track to return to profitability and positive operating cash
flow for its automotive business by 2011. Moreover, Ford's
$23.8 billion cash position should provide an adequate liquidity
cushion in the event that the pace of recovery in automotive demand is
slower than the company anticipates. Evidence of Ford's progress
in reestablishing a sustainable and competitive business model include:
the increase in its market share in both the US and Europe; the narrowing
price gap between key Ford vehicles sold in the US and competing vehicles
from Japanese manufacturers; the company's expectation that
structural costs for 2009 will be reduced by $5 billion compared
with earlier expectations of a $4 billion reduction; and the
$2.5 billion increase in its gross cash position to $22.8
billion during the third quarter.
Despite the favorable operating and financial momentum that Ford is exhibiting,
as evidenced in its strong third quarter performance, Moody's
cautions that the company continues to face considerable intermediate-term
challenges. Most importantly, market demand in the key regions
of North America and Europe will likely remain below the level necessary
to support breakeven performance until 2011. As a result,
we expect that Ford's key credit metrics for 2009 and 2010 will
be weak for the B3 rating category. For fiscal 2009, the
company's operating cash burn could exceed $5 billion and
the ratio of EBITA/interest will likely be negative. For 2010,
rising shipment levels should improve operating performance and the pace
of automotive cash burn will narrow considerably relative to the 2009
level. Nevertheless, we estimate that the cash burn will
remain very sizable and that EBITA/interest will be less than 1x.
The upgrade of the PDR to B3 from Caa3 reflects Moody's view that
the likelihood has diminished that Ford will undertake some form of balance
sheet restructuring initiative (such as a significant below-par
exchange offer or tender for outstanding obligations) that Moody's
would view as a distressed exchange or other default event.
The stable outlook is supported by Ford's more sustainable cost
structure and by a liquidity position that appears to be adequate to fund
the large operating cash burn until there is sufficient recovery in demand
to enable Ford to reach its breakeven production levels. This level
of demand is not likely to occur until 2011.
Bruce Clark, senior vice president with Moody's said,
"We're trying to take a balanced and prospective view of Ford
with the B3 rating. Despite the company's strong third quarter,
its full-year operating performance and credit metrics for 2009
and 2010 will remain weak for the B3 rating level. However,
the evidence we see indicates that Ford is on track in its plans to re-establish
a sustainable and competitive business model. Continued progress
should enable the company to generate much stronger financial performance
during 2011 as global vehicle demand continues to recover."
As a result of critical changes in the UAW labor agreement that was ratified
in May, Ford's domestic cost structure is transitioning to
a level that will be largely competitive with that of transplants.
The key elements of the UAW agreement include: the establishment
of a two-tier wage structure; considerable tightening of eligibility
requirements for the JOBs bank program; the establishment of a UAW-run
healthcare program; and the option to meet half of its future obligations
to the UAW health care VEBA with stock rather than cash. The present
value of these obligations approximates $7 billion. Contract
modifications that were recently rejected by the UAW membership would
have been constructive if ratified, and would have preserved parity
with the modifications granted to GM and Chrysler. However,
Moody's does not believe that the rejection will materially weaken
Ford's fundamental competitive position. Beyond the benefits
in the approved UAW labor agreement, Ford's current product
offerings and its new product pipeline appear to be more competitive and
robust than at any point in the last 25 years. These factors will
help lay the groundwork for much stronger operating performance as demand
recovers. However, the company's path to improved financial
results faces potential risks, particularly those related to the
level and mix of vehicle demand. A key risk is that the recovery
in global automotive demand could be slower than expected. In addition,
any significant rise in fuel prices could accelerate the shift in demand
toward smaller vehicles that are less profitable for the company.
Moody's six-month update of its Industry Outlook for Global
Automotive Manufacturers (published in October and available on moodys.com)
anticipates that light vehicle demand in the US will be 11.5 million
units in 2010 and 13.0 million in 2011. Our base-case
forecast compares conservatively with forecasts of approximately 12 million
units in 2010 and 14.2 million units in 2011 from sources that
include JD Powers, Global Insight and General Motors Corporation's
most recently published viability plan. A scenario in which industry
shipments are closer to Moody's estimates will entail a slower pace
of recovery in Ford's performance. However, we expect
that Ford will remain on track for restoring a level of performance that
supports the B3 rating under our base case forecast, and believe
that it has the liquidity necessary to contend with the slower pace of
recovery in industry demand that we anticipate.
Clark said that, "A critical element in our assessment of
Ford is the adequacy of its liquidity position to cover all funding requirements
during the coming eighteen months. This liquidity position should
be sufficient even if the pace of recovery in US demand is slower than
that anticipated by many market participants and observers. We
also think that Ford Credit has the resources to provide adequate funding
in support of Ford's retail and wholesale operations."
Ford's Speculative Grade Liquidity rating of SGL-3,
which reflects an adequate liquidity profile during the coming 18 months,
is supported by the company's $23.8 billion cash position
at September 2009. Additional liquidity will be provided by the
recent approval of approximately $5.9 billion in Department
of Energy (DOE) loans that support investments in more fuel efficient
vehicles; the DOE loan proceeds will be disbursed over the next three
years. These liquidity sources should be adequate to meet Ford's
cash and liquidity requirements during the coming 18 months.
Ford's principal liquidity requirements include a sizable operating
cash burn that will occur during the balance of 2009 and through 2010.
This sizeable cash burn is expected to result from industry unit volume
in the US and Europe that remain near historically low levels through
2010, with no material rebound in demand until 2011. As a
result, we expect that Ford's production levels will remain
below its breakeven level through 2010, and that the company will
generate considerable negative cash flow through this period. In
addition to funding an operating cash burn, Ford will also have
to maintain sufficient cash to fund large intra-quarter swings
in its working capital position. We estimate that this minimum
cash level, which would not be available to cover operating losses,
is approximately $7.5 billion.
Although further improvement in Ford's rating during the intermediate
term is not likely, upward movement could be possible over time
if the company can demonstrate that it is likely to deliver 2011 metrics
that include: EBITA/interest approximating 2x, debt/EBITDA
below 5x, and free cash flow in the area of $2 billion.
The factors most likely to result in pressure on the rating would be a
decline in Ford's US market share below 15% compared with
a share of 15.9% for the nine months through September 2009,
or any widening in the price gap between Ford vehicles and comparably
equipped vehicles of Japanese or Korean manufacturers. Ratings
pressure could also result if it appears likely that the company will
deliver 2011 credit metrics at the following levels: EBITA/interest
below 1x; debt/EBITDA above 6.5; and negative free cash
Ratings raised include:
Corporate Family Rating: to B3 from Caa1
Probability of Default Rating: to B3 from Caa3
Secured bank debt: Ba3 LGD2, 11 from B1 LGD2, 10
Senior unsecured debt: Caa1 LGD4, 65 from Caa2 LGD4,
Trust preferred: to Caa2 LGD6, 94 from Caa3 LGD6, 94.
The last rating action on Ford occurred on September 3, 2009 and
included an upgrade of the company's CFR to Caa1 from Caa3,
an improvement in the Speculative Grade Liquidity rating to SGL-3
from SGL-4, and a change in the rating outlook to Stable
The principal methodology used in rating Ford is Moody's Global
Automotive Manufacturer Methodology which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Ford Motor Company, headquartered in Dearborn Michigan, is
leading global manufacturer of automobiles.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Moody's raises Ford rating to B3; outlook is stable.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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