DBRS Confirms Ford Motor Company, Changes Trend to Stable

DBRS has today confirmed the ratings of Ford Motor Company (Ford or the Company), including Ford’s Issuer Rating at CCC (high). Ford’s Senior Secured Credit Facilities and Long-Term Debt are confirmed at B (low) and CCC, respectively. Ford Motor Credit Company LLC and Ford Credit Canada Limited’s short- and long-term debt have also been confirmed at B (low) and R-5, respectively. (This confirmation reflects the maintenance of the one-notch rating differential between the parent company and the credit company.)

The trend of the ratings has been changed from Stable from Negative. The trend change reflects the Company’s recent progress in lowering its cash burn and in firming its market share in the key North American and European markets. Ford is developing positive product momentum, as evidenced by favorable results in recent quality surveys. The Company also appears to have benefited from the difficulties of General Motors Corporation (GM) and Chrysler Group LLC (Chrysler), both of which have lost market share through their respective bankruptcy proceedings. DBRS notes, however, that Ford’s ratings continue to reflect very weak automotive industry conditions, particularly in North America and Europe. In addition, although the Company’s use of cash appears to have moderated significantly from very high levels in 2008, DBRS notes that Ford does continue to burn cash, with liquidity remaining a concern over the medium term; this remains consistent with the currently assigned ratings.

The Company’s 2009 second quarter results revealed further losses (excluding special items). However, DBRS notes that Ford’s losses narrowed considerably relative to prior periods, with its cash balances remaining essentially unchanged. Ford’s consolidated pre-tax loss for the quarter totaled $424 million, with the automotive operations incurring a loss of $1.019 billion that was partially offset by pre-tax earnings of $595 million from the financial services business. Results of the automotive operations continue to be dominated by North America, which incurred a pre-tax loss of $851 million. Including special items, the Company’s net income for the second quarter was $2.3 billion, although this incorporates a gain on debt reduction of $3.4 billion associated with Ford’s recent debt restructuring (please see DBRS’s press release dated April 6, 2009, for more information).

Significantly, the Company’s cash balances as of June 30, 2009, totaled $21.0 billion, effectively unchanged from the $21.3 billion total as of March 31, 2009. (DBRS notes that as the secured revolver was fully drawn in early 2009, Ford’s cash balances represent its primary source of liquidity.) The constant cash balances are a function of two items. First, Ford’s operating-related cash burn in the second quarter amounted to $1.0 billion, a significant improvement from the $3.7 billion use of cash in Q1 2009, and a sharp reduction from the $7.2 billion in cash burned in the last quarter of 2008. Second, the Company raised approximately $1.6 billion through a public offering of 345 million common shares (for further details please refer to DBRS’s press release dated May 11, 2009). These two items essentially offset each other such that, along with minor additional changes in gross cash, Ford’s cash balances remained essentially constant as of the end of Q2 2009. The existing cash balances and decreasing use of cash suggest that the Company has readily sufficient liquidity through the end of 2009.

However, despite this recent improvement, Ford’s financial profile and liquidity position remain weak and continue to reflect the assigned ratings. The Company still faces strong headwinds in its turnaround. Should the automotive downturn continue well into 2010 with depressed industry volumes, liquidity could come under pressure in the second half of next year, although DBRS considers this scenario as rather unlikely.

With respect to additional sources of liquidity, given its successful common share offering in May and in light of the improving performance in recent months, in DBRS’s opinion Ford could potentially tap the equity markets again in the near to medium term. The Company would appear to have little room to raise additional debt as most of its assets are already encumbered in association with the secured financings executed in late 2006. Ford is looking to sell its Volvo Cars unit (i.e., Volvo is currently reported as “held for sale”), although the Company has not given any indication with respect to specific timing.

DBRS believes that the U.S. government-supported restructurings of GM and Chrysler through bankruptcy could potentially be to the detriment of Ford. While the Company was able to reduce total debt by approximately $10 billion through its debt exchange completed in Q2 2009, DBRS notes that this did not match concessions achieved by GM and Chrysler from their creditors. GM and Chrysler have also been more aggressive in rationalizing their dealer networks. Furthermore, these two companies were able to fully exchange their respective Voluntary Employee Beneficiary Association (VEBA) obligations with equity, while Ford has thus far negotiated the use of stock for up to 50% of its VEBA obligations, with $6.6 billion in cash obligations remaining. Ford must also recommence negotiations with the United Auto Workers and the Canadian Auto Workers to more closely align its respective union agreements with those more recently obtained by GM and Chrysler. DBRS notes that Ford has consistently maintained that it would not be disadvantaged by the concessions achieved by GM and Chrysler through bankruptcy. While DBRS acknowledges that Ford has been largely successful in substantially revamping its cost structure outside of bankruptcy, it remains to be seen whether these advances will essentially match those achieved by its two Detroit rivals.

However, Ford’s differentiation from GM and Chrysler does appear to have generated some goodwill among consumers. DBRS notes that Ford’s recent sales momentum in North America is impressive. In its native U.S. market, Ford increased its share as of Q2 2009 to 16.4%, a sharp improvement of 2.5 percentage-point change relative to its first quarter performance of 13.9%. Additionally, in July, Ford was one of only two original equipment manufacturers (OEMs) in the U.S. market to post a year-over-year sales increase, as the Company benefited from the Car Allowance Rebate System (CARS) that was implemented near the end of the month. In Canada, Ford was the market leader for the month of June and was able to repeat that achievement in July. Furthermore, demonstrated improvements in product quality and a favorable product cadence over the medium term suggest that Ford should be able to continue its relatively positive sales performance going forward, although its Detroit Three peers, particularly GM, are expected to be stronger competitors in the medium term.

The Stable trend on the ratings reflects DBRS’s view that the severe liquidity pressures that recently faced Ford have now abated considerably in light of the Company’s improving results and decreasing use of cash. Additionally, the Company is well positioned to benefit from an eventual recovery in the U.S. market, where a material rebound (i.e., total industry sales in the range of twelve to thirteen million units) from the prevailing very weak conditions could lead to Ford approaching profitability. Further positive rating implications could result in the event that Ford’s momentum persists and operating results continue to improve, strengthening its liquidity position and credit profile.

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

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

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