DBRS Comments on Ford’s Q4 Results and Drawdown of its Secured Revolver

DBRS notes that Ford Motor Company (Ford or the Company) today announced preliminary 2008 fourth quarter and full year results. The performance was very weak, with the Company’s reported net income for the fourth quarter and fiscal year amounting to losses of $5.9 billion and $14.6 billion, respectively. However, the year-end figure includes significant special items that incorporate more than $7 billion in impairments of both Ford and Ford Motor Credit Company LLC (Ford Credit), attributable to the significant shift in vehicle segmentation away from larger vehicles (such as pick-up trucks and SUVs) and toward smaller vehicles (cars and crossovers). Excluding the special items, Ford’s consolidated operations generated pre-tax losses of $3.7 billion and $6.7 billion, respectively. More significantly, the Company used $5.5 billion in cash in the fourth quarter, with Ford’s total use of cash in 2008 amounting a very alarming $21.2 billion.

The poor results are a function of weak automotive markets that prevailed in 2008, but which have become much worse in recent months, as economic concerns in the United States proliferated to a global financial crisis. Tight credit markets and shaken consumer confidence had a severe negative effect on demand. In North America, a sudden and drastic drop in industry volumes occurred in the last quarter, with the seasonally adjusted annual rate (SAAR) equaling 10.6 million units, which represented the lowest quarterly level since 1981. Sales levels in other major markets also dropped sharply in the last quarter. In Europe, volumes were down 4% year-over-year through the first nine months of 2008; however by year-end, the annual decrease amounted to 8% given the extremely weak last quarter. DBRS notes that Ford’s sales performance in its core North American market was in line with its competitors, as the Company managed to gain share in the United States in each of the last three months of 2008.

However, original equipment manufacturers (OEMs) have been unable to react quickly enough to the sudden and striking drop in industry volumes, resulting in a significant depletion of their liquidity positions. As of year-end, Ford’s cash position stood at $13.4 billion. In response to the uncertainty surrounding the global economy and financial markets, Ford today also announced that it intends to fully draw its secured credit lines, which will bolster the Company’s liquidity position by an additional $10.1 billion for a total liquidity position of $24 billion. DBRS therefore considers the Company’s liquidity position to be sufficient over the near- to medium-term. However, in the event of a failure of an OEM or if the North American industry should deteriorate significantly further from already historically weak levels, DBRS notes that Ford might also be eligible to receive bridge financing from the U.S. government in a provisional amount of $9 billion.

Despite the ongoing losses and severe market conditions, DBRS is of the opinion that previous rating actions are sufficient in light of Ford’s progress in its cost reduction activities and its remaining liquidity position. DBRS, however, expects Ford’s rate of cash burn to moderate considerably going forward, notwithstanding the weak sales expected in 2009. In the event that Ford’s use of cash continues unabated, this would likely have prompt negative rating implications.

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

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos and Auto Parts) rating.