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

DBRS has today upgraded the Issuer Rating of Ford Motor Company (Ford or the Company) to BB from BB (low). Pursuant to DBRS’s Rating Methodology for Leveraged Finance, the ratings of Ford’s Senior Secured Credit Facilities and Long-Term Debt have also been upgraded to BBB (low) and B (high), respectively. 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 been upgraded to BB (high) from BB. (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 ratings upgrade reflects the Company’s continuously improving performance, with Ford becoming significantly profitable from 2010 through the first half of 2011. The Company’s progress in its core North American market has been impressive amid industry conditions that, while improved vis-à-vis the recent automotive downturn, remain well below historical norms. Additionally, the Company’s financial profile continues to be restored; Ford has paid down substantial further industrial indebtedness, with the automotive segment having a net cash position of $8 billion as of June 30, 2011.

Ford has continued to generate solid momentum in its core North American market, with the Company gaining further market share (which in total approached 17% through the first eight months of 2011 in the United States, with more profitable retail share estimated at approximately 14% over the same period). The market share gains reflect Ford’s strong product cadence, as the Company’s model replacement rate exceeds the industry average. The Company’s consistently well-received product launches have significantly bolstered its brand reputation and improved its quality image (notwithstanding a nominal setback this spring associated with Ford’s interactive driver communication systems). DBRS also notes that Ford has managed to meaningfully expand its product range with the Fiesta and recently launched Focus models being very competitive in the car segment (and achieving significant conquest sales away from other original equipment manufacturers (OEMs)). Persistent pricing gains and higher equipment levels across the Company’s product portfolio have significantly increased per unit revenues. Ford has also effectively marketed its EcoBoost technology, not only in cars but also (perhaps more significantly) in trucks, with the turbocharged powertrains selling at a premium vis-à-vis larger displacement conventionally aspirated engines. The combination of the above amid moderately higher industry volumes and the Company’s significantly revamped cost structure has enabled Ford to generate significant profitability in North America.

Given its solid cash generation and healthy liquidity, Ford is continuing to take steps to reduce its debt burden and improve its balance sheet, having reduced the indebtedness of the automotive operations by more than $13 billion in the last twelve months ending June 2011. Notable debt reductions over this period include Ford paying down all of its secured revolving credit facility (of which the Company retains full availability). Additionally, the Company paid down $3.4 billion of its secured term loan (with the remaining $1.8 billion also being repaid as of September 15, 2011). Ford also satisfied all obligations toward the United Auto Workers (UAW) Voluntary Employee Beneficiary Association (VEBA) Trust. Through stock conversion offers, the Company achieved reductions in its unsecured convertible notes from $3.5 billion to $900 million. Finally, Ford wholly redeemed its subordinated convertible debentures. As a result of these debt reductions and strong cash flow, Ford’s balance sheet has been substantially improved, with the automotive segment having a net cash position of $8 billion as of June 30, 2011.

Regarding the Company’s financial profile, DBRS notes that income- and coverage-based credit metrics (e.g., debt-to-EBITDA, EBIT-to-interest) effectively exceed levels commensurate with the current ratings. With respect to Ford’s balance sheet, DBRS notes that the Company’s equity base stands to be substantially bolstered in the near term (i.e., by year-end 2011) through the expected release of tax valuation allowances of an amount estimated at $14 billion (DBRS estimate).

Notwithstanding Ford’s considerable recent progress, DBRS notes that the Company continues to face some challenges. First, while the Company’s turnaround in North America has been remarkable, Ford presently remains too dependent on its home market with respect to earnings. Ford Europe’s results over the past two years have been significantly undermined by negative volume and mix effects in line with challenging industry conditions. In addition to turning around its performance in Europe, Ford must also work toward increasing its presence in the BRIC markets, particularly since emerging markets are expected to represent the majority of growth for the global automotive industry going forward. Second, the performance of the Lincoln luxury brand has been underwhelming in recent years, with the Company’s turnaround focused on its ‘One Ford’ strategy. Ford is attempting to address this through several forthcoming launches of Lincoln products in the near future; DBRS notes that these models will play a significant role in determining Lincoln’s long-term viability.

With respect to the Company’s current contract negotiations with the UAW, Ford is the most vulnerable of the Detroit Three as it is the only company possibly subject to strike action (in the UAW’s efforts to regain some of the concessions made during the automotive downturn). Thus far, a strike has been averted, although negotiations have persisted such that an extension of the current contract (which expired on September 14, 2011) was necessary (as expected by DBRS). While DBRS assumes that the resolution of a new labour agreement will likely come at some cost to the Company, DBRS expects that Ford will be able to readily absorb such increases given its significantly improved financial profile (as well as the materially diminished representation of its U.S. hourly workforce). (The assumption of a prudent resolution of the UAW negotiations is incorporated in today’s ratings action.)

The Stable trend on the ratings reflects the above-cited headwinds facing the Company, in addition to a lacklustre economic environment in Ford’s native U.S. market. However, should the Company’s performance momentum persist and Ford demonstrate progress in Europe as well as an ability to successfully turn around Lincoln, the ratings could be subject to further positive action.

Notes:
The applicable methodologies are Rating Companies in the Automotive Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.