DBRS Upgrades Ford Motor Company to B, Trend Now Positive

DBRS has today upgraded the Issuer Rating of Ford Motor Company (Ford or the Company), to B from B (low). Additionally, Ford’s Senior Secured Credit Facilities have been upgraded to BB (low) from B (high) pursuant to its recovery rating of RR2, (which reflects an estimated 70% to 90% recovery of principal amounts under a hypothetical default scenario), while the Company’s Long-Term Debt has been upgraded to CCC (high) from CCC in accordance with a recovery rating of RR6 (incorporating an estimated 0% to 10% recovery of principal amounts under a hypothetical default scenario). 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 (high) from B. (This ratings action reflects the maintenance of the one-notch rating differential between the parent company and the credit company.) The short-term ratings of both finance subsidiaries have also been upgraded to R-4 from R-5. The trend of the long-term ratings has been changed to Positive, with the trend remaining Stable for the short-term ratings.

The ratings upgrade reflects the Company’s ongoing improvement in its performance, as demonstrated by its current strong product momentum that has resulted in increasing market share in 2009 through early 2010, with March sales also expected to be strong. Additionally, Ford’s cash burn has been dramatically reduced from more than $21 billion in 2008 to essentially break-even levels last year. Accordingly, the liquidity risk of the Company is now sharply diminished, with its $25.5 billion in cash balances as of year-end 2009 appearing well sufficient over the near- to medium-term (this in turn has prompted Ford to recently announce that it plans to pay down $3 billion of its secured revolver in April). The Positive trend on the long-term ratings acknowledges that the Company’s performance may continue to improve as ongoing product momentum and pricing gains are bolstered by industry volumes in its core U.S. market that are expected to materially increase this year (albeit from very weak levels). Additionally, through restructuring initiatives including extensive contract negotiations with the United Auto Workers (UAW), Ford’s cost structure at year-end 2009 was reduced by close to $15 billion relative to a 2005 year-end base. The projected higher sales levels amid the revamped cost structure should enable the Company to be modestly profitable this year, with additional profitability forecast in 2011 in line with the expected ongoing recovery in automotive conditions. However, DBRS also notes that economic headwinds persist in the United States, with some competitors possibly applying significant vehicle incentives in the near term to increase sales, with such practices possibly diluting margins across the industry.

Ford’s market share gains in the United States appear to be attributable to several factors. Firstly, several recent product launches, including the Fusion and Taurus, have been well received in the marketplace. Additionally, in various recent vehicle quality surveys, the Company’s rankings have been consistently higher. DBRS also notes that it appears that Ford has likely benefited from increased consumer goodwill as a result of it being the only manufacturer of the Detroit Three to avoid bankruptcy proceedings last year. DBRS expects the Company’s product momentum to persist in the near future in line with several forthcoming model launches that render Ford’s product cadence very favourable relative to most of its competitors. Significantly, small- and medium-sized passenger cars feature highly among the planned model introductions, with the Fiesta showing promise given its strong sales in Europe (where it is already available) and the next generation Focus expected to be launched nest year. The Company is also defending its leading position in trucks and sport utility vehicles (SUVs), with forthcoming launches of the next generation Super Duty and Explorer. While trucks remain prominent, the much bolstered car portfolio should likely render Ford less vulnerable to future shifts in vehicle segmentation away from pick-up trucks and SUVs and toward cars.

DBRS also notes that Ford recently announced that it had reached an agreement with respect to the sale of Volvo Car Corporation (Volvo) to Zhejiang Geely Holding Group Company Limited (Geely). The Company now expects the transaction to close in the third quarter of 2010. The pending sale of Volvo follows previous divestitures of Ford’s Aston Martin and Jaguar Land Rover operations and is wholly consistent with the ONE Ford strategy intended to enable senior management to focus on the continuing revitalization of the global Ford brand.

However, DBRS notes that near-term risks remain that could undermine the Company’s rebound, including the rate of economic recovery in the United States, which could still be confronted by a double-dip recession. Additionally, Toyota Motor Corporation (Toyota), in response to its current recall crisis, may persist in offering significant vehicle incentives for a rather extended time period, with General Motors Corporation (GM) possibly also resorting to incentives in an effort to boost its market share; such actions would put negative pressure on industry margins. Ford’s market share may also be subject to some moderate softening, partly as a result of the eventual product momentum of GM and Chrysler as well as the ongoing shift in vehicle segmentation toward small cars (where the Company’s share will continue to be less than in trucks notwithstanding the substantial improvement in its car line).

Additionally, despite the ongoing improvement in Ford’s operating performance, DBRS notes that the Company’s financial profile remains weak, particularly its balance sheet. While Ford achieved a debt reduction of $9.9 billion through various debt exchange programs implemented last year, this did not match concessions obtained by Chrysler LLC (later Chrysler Group LLC, Chrysler) and GM through their respective bankruptcies. Additionally, with respect to the Voluntary Employee Beneficiary Association (VEBA) obligations, Chrysler and GM attained 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. As of December 31, 2009, the total debt of the Company’s automotive operations amounted to $34.4 billion (which includes the recognition of Ford’s remaining VEBA obligations as debt).

DBRS considers the ratings to be possibly subject to further positive actions given the Company’s expected favourable performance relative to its peers amid industry volumes that are forecast to progressively increase. However, Ford must demonstrate good progress in addressing the near-term challenges cited above prior to a further ratings upgrade, which would also be dependent on a recovery of Ford’s financial profile, with coverage measures needing to attain sustained positive levels and the Company’s balance sheet subject to further improvement.

Note:
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.