DBRS Confirms Ford Motor Company, Trend Negative

DBRS has today confirmed the ratings of Ford Motor Company (Ford or the Company), including Ford’s Issuer Rating at B (low). Ford Motor Credit Company LLC and Ford Credit Canada Limited’s short- and long-term debt are confirmed at B and R-4, respectively. The trends are changed to Negative. (This confirmation reflects the maintenance of the one notch rating differential between the parent company and the credit company). Additionally, based on DBRS’s Leveraged Finance Rating Methodology (see press release dated June 9, 2008 for details), DBRS has assigned recovery and instrument ratings to Ford’s Senior Secured Credit Facilities and Long-Term Debt of RR3/B (previously rated B (high), the new rating a result of the Leveraged Finance Rating Methodology) and RR5/CCC (high), respectively. Notwithstanding the challenging environment, DBRS is confirming the Issuer Rating, albeit with a Negative trend, (which is assigned to all ratings). The ratings action reflects our opinion that for the time being, past rating downgrades are sufficient in light of Ford’s ongoing positive performance in automotive markets outside North America, progress in cost reductions and the continuing (albeit reduced) liquidity position. All the ratings are now on Negative trend, reflecting the sharp downturn in the U.S. automotive industry, combined with the dramatic shift in vehicle segmentation toward smaller vehicles and away from SUVs and pick-up trucks, which represent the Company’s traditional product strengths. With this rating action, Ford is removed from Under Review with Negative Implications, where it was placed on June 20, 2008.

The Company’s business profile has been significantly undermined by the dramatic deterioration of the automotive industry in North America, where aggregate demand has dropped sharply given the well-documented economic concerns in the United States. Light vehicle sales in this market are estimated to be in the range of 14.0 million units, which represents the lowest total in well over a decade. This has been exacerbated by the sharp rise in oil and fuel prices, which has resulted in a significant acceleration of the shift away from larger vehicles (such as SUVs and pickup trucks) and toward smaller vehicles (e.g., passenger cars and crossover utility vehicles (CUVs)). Ford has been materially adversely impacted by these market developments as it previously focused on the larger (and typically more profitable) vehicles and as such is currently under-represented in the smaller vehicles segment. The shift in vehicle segmentation has been so dramatic that it compelled the Company to actually delay the introduction of the new F150 (given high inventories of the existing model), Ford’s flagship model that was previously also the best-selling vehicle in the United States for more than twenty consecutive years. Through July 2008, the Company’s unit sales for the year dropped 15%, relative to a total decline of 11% in the U.S. market. (Ford’s retail market share has, however, held relatively firm, with much of the lost sales being attributable to a deliberate reduction in fleet activities, particularly daily rental.)

In the second quarter (ending June 30) of 2008, the Company posted a record loss of $8.6 billion. DBRS notes that the results incorporate large (albeit non-cash) impairments for both Ford’s automotive operations and Ford Motor Credit Company LLC (Ford Credit) in the amounts of $5.3 billion and $2.1 billion, respectively; the impairments can also be attributed to the sharp shift in vehicle segmentation described previously. Ford’s North American automotive operations incurred a second quarter loss of $1.3 billion (vis-à-vis a loss of $300 million in the second quarter of 2007).

In reaction to the deteriorating U.S. market, Ford last month unveiled an accelerated Transformation Plan (the Transformation). The Transformation incorporates a stronger shift toward lean manufacturing (i.e., matching capacity to demand), smaller vehicles and fuel-efficient powertrains. Key components of the Transformation include the following:
– Additional small cars and CUVs to be introduced in North America, including several models in the B and C segments that will be transitioned from Europe.
– Three truck and SUV plants to be converted to small cars, with retooling to begin in December 2008.
– Hybrid vehicle production and lineup to double by 2009.
– Four-cylinder engine capacity in North America to double by 2011.

While DBRS views positively the measures put forward by the Transformation, it has also noted that most of the associated benefits are not expected to result prior to 2010, when Ford will also gain significant cash savings as its new labour agreement with the United Auto Workers (UAW) comes into full effect. However, DBRS views the 18 months prior to 2010 as the most challenging period confronting the Company, with industry conditions in North America expected to remain severe.

While North America remains Ford’s core market (with a turnaround in this region vital for the Company’s long-term viability), its business profile does benefit from significant international operations. DBRS notes that the foreign operations now represent approximately 45% of total revenues and generated more than $4 billion in pre-tax profits in the 18 month period ending June 2008.

While Ford’s cash burn rate going forward remains a significant concern, liquidity would appear to be satisfactory for the short-term, with the Company’s liquidity position being stronger than either that of Chrysler LLC (Chrysler) or General Motors Corporation (GM). As of June 30, 2008, Ford’s cash position totaled $26.6 billion, with an additional $11.6 billion available in secured and unsecured credit lines. Taking into account first half results with anticipated further losses through the end of the year, DBRS expects cash balances of approximately $20 billion as of year-end 2008.

DBRS notes that as most of Ford’s assets are already encumbered, the Company has little room to raise additiona1 debt. Similarly, while Ford is said to be considering further asset sales, DBRS does not expect significant proceeds to be generated from such divestitures, which would more likely be executed to reduce the distraction of senior management as it proceeds further with the Company’s restructuring activities. Notwithstanding the above, Ford’s liquidity position should suffice through 2010, particularly in light of the remaining credit availability. (DBRS notes that the Company remained well in compliance with its borrowing base requirements as of June 30, 2008.) Ford’s debt maturity schedule is also favourable, with no significant maturities over the next four years.

The ratings trend is Negative. In the event that losses and associated cash outflows escalate well above the level already anticipated, a downgrade would be likely. DBRS notes, however, that as of January 1, 2010, Ford’s prospects will improve considerably as its revised labour agreement with the United Auto Workers (UAW) comes into effect, substantially reducing the Company’s cash outflow. Furthermore, there may also be a significant level of pent-up demand for automotive vehicles by this timeframe in light of the depressed sales levels (i.e., well below secular trend) expected to persist for the remainder of 2008 and through 2009.

Note:
All figures are in U.S. dollars unless otherwise noted.