DBRS Comments on Ford’s Labour Agreement with the United Auto Workers Union

DBRS notes that Ford Motor Company (Ford or the Company; Issuer Rating BB, Stable) announced yesterday that a new four-year national labour agreement (the Agreement) has been ratified by its employees represented by the United Auto Workers (UAW) union; 63% of whom voted in favour of the Agreement. While DBRS’s recent upgrade of Ford’s long-term ratings (for details, please refer to DBRS’s press release dated September 16, 2011) had incorporated a prudent resolution of the labour negotiations, DBRS nonetheless considers the ratification of the Agreement to be a positive development for the Company, particularly in view of the fact that initial indications suggested that the ratification might be at risk.

Highlights of the Agreement include the following:

(1) Ford is to add 12,000 hourly jobs in its U.S. manufacturing facilities by 2015, including in-sourcing from Mexico, China and Japan.

(2) The Company will invest $16 billion in its U.S. operations by 2015, $6.2 billion of which will be in plant-specific investments.

(3) Ford also confirmed product commitments for various facilities, including those located in Chicago, Dearborn, Kansas City, Kentucky, Louisville and Michigan.

DBRS notes that Ford was somewhat vulnerable entering the UAW negotiations as it was the only one of the Detroit Three whose previous labour contract did not contain a “no strike” provision. However, the Company managed to avert a strike through the negotiation of the Agreement while also obtaining terms and conditions broadly similar to those achieved by General Motors Company (GM) and Chrysler Group LLC (Chrysler). (DBRS notes that Chrysler’s revised labour agreement remains subject to ratification.) While certain aspects of Ford’s Agreement (such as signing bonuses and lump sum inflation protection payments) are moderately more generous vis-à-vis those of GM and Chrysler, DBRS notes that these increases in aggregate are not material. Ford estimates that its U.S. compensation costs will grow by less than 1% annually through the term of Agreement, enabling the Company to remain highly competitive in North America. DBRS also notes that the Company achieved additional manufacturing flexibility and productivity improvements through the Agreement. In the event that U.S. industry volumes rise materially, profits derived from Ford’s added production flexibility will readily more than offset the higher costs resulting from the Agreement.

DBRS notes that Ford remains very well positioned to benefit from the ongoing recovery of the automotive industry. The Company’s product momentum has notably included several successful model launches in the medium- and compact-car vehicle segments, with Ford now having a well-diversified product portfolio. However, DBRS also observes that persistent economic uncertainties in the United States and particularly in Europe could yet derail the recovery in these developed markets (and potentially trigger another downturn). In the event that the Company’s earnings momentum persists despite the above-cited economic headwinds, positive rating implications would likely result.

Note:
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.