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Rating Action:

Moody's raises Ford rating to B3; outlook is stable.

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 flow.

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, 66

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 from Negative.

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.

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

Moody's raises Ford rating to B3; outlook is stable.
No Related Data.
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