DBRS Upgrades Ford Motor Company to B (low), Stable Trend

DBRS has today upgraded the Issuer Rating of Ford Motor Company (Ford or the Company), to B (low) from CCC (high). Concurrently, the Issuer & Long-Term Debt rating of Ford Motor Credit Company LLC (Ford Credit) and the Long-Term Debt rating of Ford Credit Canada Limited have also been upgraded to B from B (low). (This rating action reflects the maintenance of the one-notch rating differential between the parent company and the credit company as well as DBRS’s continuing belief that the credit company’s business is somewhat more resilient than that of the parent.) The short-term ratings of both finance subsidiaries remain at R-5. The trend of the ratings is Stable. DBRS has also assigned ratings of B (high) and CCC to Ford’s Senior Secured Credit Facilities and Long-Term Debt, respectively; the rating differential between the Issuer Rating and the instrument ratings reflects the difference in recovery expectations for the senior secured facilities compared with the unsecured facilities, in the event of default, as explained in DBRS’s Rating Methodology for Leveraged Finance. (DBRS notes that the recovery rating of the senior secured debt has been amended to RR2 from RR3, with that of the unsecured debt also changed to RR6 from RR5.)

The ratings upgrade reflects the Company’s considerable progress in lowering its cash burn and thereby maintaining its liquidity position. DBRS notes, however, that a protracted turnaround is required in order for the Company to significantly improve its still-weak financial profile. In the event that Ford improves its performance further and appears able to generate sustained profitability in spite of a cost base that may prove to be higher than its peers, DBRS would consider further positive rating actions.

Following an exorbitant use of cash in 2008 that exceeded $21 billion, DBRS notes that Ford’s cash balances from March through September of this year have essentially held firm amid industry volumes that were sharply lower than last year’s already very weak levels. Ford’s ongoing cost-cutting efforts have significantly contributed to this improvement, with such reductions through year-end 2009 expected to total approximately $14.5 billion relative to a 2005 year-end base.

This has been supplemented by the Company’s current strong product momentum, as demonstrated by Ford’s higher rankings in various recent quality surveys, with new model launches being well received. In contrast to recent historical periods when the Company was highly overweighted in large pick-up trucks and sport utility vehicles (SUVs), DBRS notes that the current product momentum includes Ford’s car line, as evidenced by the strong launches of the new Fusion and Taurus, with forthcoming North American introductions of the Fiesta and next generation Focus also showing promise, given their existing sales in Europe. While trucks remain prominent, the much-bolstered car portfolio should likely render Ford less vulnerable to any future sudden shift in vehicle segmentation (which, however, has moderated this year given the softening of fuel prices amid the economic downturn). As a function of the above, Ford has achieved material market share gains in North America and Europe, with it appearing to have benefited from the difficulties of General Motors Corporation (GM) and Chrysler Group LLC (Chrysler), both of which lost share through their respective bankruptcy proceedings.

Ford has also made significant progress in revamping its balance sheet. In the first half of this year, the Company executed a series of exchange offers that, in aggregate, lowered the debt burden of the automotive operations by $9.9 billion. In May, Ford also tapped the public equity markets through the issuance of 345 million common shares for proceeds of approximately $1.6 billion. The Company continued this balance sheet restructuring through additional actions announced in November. Firstly, Ford executed an extension of its secured revolving credit line from December 2011 to November 2013 (with the facility in turn being reduced by $1.9 billion). The Company also issued $2.875 billion in senior convertible notes due 2016. Lastly, Ford announced an equity distribution plan through which it intends to issue up to $1 billion in common shares on an opportunistic basis commencing in December 2009. DBRS notes that Ford’s demonstrated ability to access the public debt and equity markets has served to further improve its financial flexibility.

Notwithstanding the above, DBRS notes that Ford’s recent differentiation vis-à-vis GM and Chrysler has also somewhat hindered the Company’s efforts in reducing its indebtedness and cost base. While the results of Ford’s debt exchange were significant, DBRS notes that the Company’s leverage remains high. Furthermore, with respect to the Voluntary Employee Beneficiary Association (VEBA) obligations, Chrysler and GM gained the ability to fully exchange such obligations with equity while Ford negotiated the use of stock for only up to 50% of its VEBA obligations, with $6.7 billion in cash payments remaining. Also concerning the United Auto Workers (UAW), notwithstanding the endorsement of UAW leadership, rank and file members of the union elected to reject contract modifications sought by the Company for the 2007 National Labor Agreement that were previously obtained by GM and Chrysler. (Highlights of these concessions included wage freezes for entry-level workers and a no-strike clause.) In doing so, the UAW effectively disrupted the system of pattern bargaining that had been in practice for decades, providing equal terms to each of the Detroit Three. Ford may therefore be at a competitive disadvantage with respect to its cost position.

While the Company remains a global automotive manufacturer, Ford’s ultimate recovery lies in its ability to generate a turnaround in its core North American operations, which historically have dictated the profitability of the automotive business. After sizeable losses extending several years, the Company’s ability to achieve a profit in North America in the most recent quarter is noteworthy, particularly amid industry volumes that remain at very weak levels. In the event that volumes approach historical norms, it appears that the Company’s automotive operations could become solidly profitable. However, DBRS notes that the recovery of the automotive industry remains subject to considerable uncertainty in the near term, particularly with respect to Ford’s main markets of North America and Europe. In the United States, DBRS projects annual industry volumes in 2010 to approach 11.5 million to 12 million units, which would represent a significant increase to 2009 volumes (estimated at roughly 10.3 million units) but would still be sharply below 2007 levels (which exceeded 16 million units). Additionally, ongoing economic challenges could yet significantly derail this forecast. Economic headwinds also persist in Europe, where demand in many major markets, particularly Germany, is expected to further soften in 2010 due to extensive vehicle sprappage incentive programs implemented this year that have likely pulled demand forward.

Notwithstanding the above challenges, DBRS views Ford’s performance this year positively and views the Company’s liquidity risk to be considerably diminished in light of its much-reduced cash burn, with Ford appearing well positioned to benefit from the eventual recovery in the industry.

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

The applicable methodologies are Rating Automotive Suppliers and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.

This is a Corporate rating.