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

DBRS has today upgraded the Issuer Rating of Ford Motor Company (Ford or the Company) to BB (low) from B. Additionally, Ford’s Senior Secured Credit Facilities have been upgraded to BB (high) from BB (low) pursuant to the assigned recovery rating of RR2 (which reflects an estimated 70% to 90% recovery of principal amounts under a hypothetical default scenario). The Company’s Long-Term Debt has been upgraded to B from CCC (high) 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 BB from B (high). (This rating 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 been confirmed at R-4. The trend on all ratings is Stable.

The rating actions reflect the Company’s continuously improving performance, with Ford’s second-quarter earnings significantly stronger than already-solid first-quarter results and above DBRS’s expectations. Additionally, Ford has undertaken to expeditiously reduce the leverage of its automotive operations, having reduced automotive indebtedness by $7 billion in the Q2 2010, with the Company also announcing that it expects its automotive operations to be in a net cash position by year-end 2011.

For the three-month period ending June 30, 2010, the Company generated total pre-tax profit of $2.9 billion vis-à-vis $2.0 billion generated in the first quarter. DBRS notes that the significant majority of the improved performance is attributable to the automotive operations, particularly Ford’s core North American market, where the Company generated $1.9 billion in pre-tax profit, representing an increase of $645 million relative to Q1 2010 (and close to $2.8 billion vis-à-vis the similar prior-year period). The stronger performance in North America reflects ongoing volume increases, given continuing gains in market share amid moderately improving industry conditions. Ford has also continued to achieve pricing gains and reduce the level of incentives offered on its vehicles, reflective of significant product momentum following consecutive successful launches of several models, examples of which are the Fiesta and soon-to-be-launched Explorer. The Company has also been making consistent strides in its vehicle quality, with such progresses being highlighted by favourable results in numerous recent quality surveys.

While Ford’s performance in North America is the most noteworthy, its automotive operations are currently profitable across all major geographic segments, and its financial services operations have also generated solid margins as lower credit losses and improving residual values on leased vehicles have more than offset lower volumes. DBRS considers Ford’s recent performance to be impressive, particularly given the significant headwinds that remain in the industry. While volumes in North America have moderately increased year-over-year, DBRS notes that the seasonally adjusted annual rate (SAAR) through the first half of 2010 totalled 11.2 million units, which remains well below the 16 million unit level that typically prevailed prior to the global economic downturn. Additionally, conditions in Europe are weak and are expected to remain so through the rest of 2010, as scrappage incentives (which proved highly successful in raising volumes in 2009) are phased out in most markets across that continent. DBRS notes that Ford’s profitability would in all likelihood be bolstered further should industry volumes in North America and Europe begin to approach historical norms.

Given the Company’s solid cash generation and healthy liquidity, Ford is continuing to take further steps to reduce its debt burden and improve its balance sheet, having reduced automotive operations indebtedness by $7 billion in the second quarter. Ford paid down $3 billion of its secured revolving credit facility in the most recent quarter. The Company also paid down $4 billion in Voluntary Employee Beneficiary Association (VEBA) obligations. As of June 30, 2010, the Company’s net debt position was at $5.4 billion, vis-à-vis $9 billion as of the end of Q1 2010. Given its progress in paying down debt and its expected future profitability amid a positive outlook, the Company announced that it expects its automotive operations to be in a net cash position as of year-end 2011.

Notwithstanding Ford’s considerable recent progress, DBRS notes that the Company continues to face several challenges. While recent debt reduction has been significant, indebtedness at Ford continues to be higher than at either General Motors Corporation or Chrysler Group LLC (Chrysler), as both of these companies were able to shed substantial debt through their respective bankruptcies last year. The competitive landscape in Ford’s native U.S. market will also likely become more challenging in the near to medium term with the potential reemergence of Chrysler, with Volkswagen AG and the Korean auto manufacturers also expected to increase their presence going forward. Outside North America, the Company continues to be a minor player in China, the world’s largest automotive market, where Ford’s market share significantly lags that of industry leaders.

DBRS expects Ford’s ratings to remain constant in the near term. The Stable trend on the ratings acknowledges that the Company’s performance should continue to reflect ongoing product momentum and pricing gains bolstered by industry volumes in its core U.S. market. Ford’s profitability in H2 2010 will, however, be affected by lower production in the latter half of the year; this is attributable to planned shutdowns in the third and fourth quarter associated with holidays and new model changeovers. However, Ford’s strong product line should continue to generate improving sales as volumes gradually increase in its core markets, with the Company appearing well positioned to benefit from the eventual recovery of the automotive industry.

Note:
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 & Auto Parts) rating.