DBRS Places Ford Motor Company Under Review with Positive Implications

DBRS has today placed the short and long-term ratings (including the recovery ratings) of Ford Motor Company (Ford or the Company), Ford Motor Credit Company LLC and Ford Credit Canada Limited Under Review with Positive Implications. The ratings action reflects DBRS’s more positive fundamental assessment of the North American automotive market, which has thus far in 2012 generated significantly higher sales levels than our previous expectations. DBRS also notes that North America continues to account for the significant majority of automotive earnings. This has enabled the Company to remain solidly profitable, even amid recent mixed results across its international operations. Ford has demonstrated substantial progress in generating consistently solid operating performance and continuously improving its financial profile; DBRS notes that the Company’s credit metrics well exceed levels commensurate with the current ratings. Moreover, notwithstanding ongoing headwinds in certain foreign markets, most notably Europe, DBRS expects Ford to generate profitability for the foreseeable future, providing further support for likely positive rating actions.

After several consecutive years of industry volumes substantially below secular trend levels, DBRS notes that U.S. automotive sales have picked up notably through early 2012. The reasons for the sales uptick are numerous and include (among other factors): a progressively improving (if still somewhat fragile) macroeconomic environment; significant pent-up vehicle demand (given a record average age of the U.S. vehicle fleet); and firm used car values that have prompted many consumers to trade in their vehicles for newer models (for further details, please refer to DBRS's commentary dated April 4, 2012.) Accordingly, DBRS has revised its expectations, with U.S. light vehicle volumes projected to be in the range of 14 million to 14.5 million units this year and progressively reverting to secular trend levels within the next couple of years.

Ford continues to deliver very strong results in its core U.S. market. In 2011 and the first quarter of 2012, Ford’s operating margins of its North American Automotive operations amounted to 8.3% and 11.5%, respectively, both of which are very solid levels for the sector. With Ford’s operations being restructured to achieve break-even results even at low industry volumes, the Company is generating substantial profitability in the region in line with increasing industry volumes, bolstered by market share gains and significantly firmer pricing as a result of consistently solid recent product launches. Moreover, DBRS notes that Ford’s product portfolio is considerably more balanced than in the past, with the Company now well positioned in the compact and mid-sized car segments that are representing a higher proportion of industry sales in response to ever-increasing fuel prices.

DBRS notes that Ford’s very solid performance in North America effectively more than offsets mixed results across the Company’s international operations. Of these, Europe is likely the most concerning with regional volumes forecast to contract materially this year (notwithstanding some significant variances between countries) as a result of strong economic headwinds associated with the sovereign debt crises of certain member nations. This is exacerbated by persistent overcapacity issues in the continent. While the Company is currently assessing how to best address its concerns in Europe, DBRS notes that Ford has managed to contain its losses, which amounted to $27 million and $149 million in 2011 and Q1 2012, respectively. DBRS notes that these are readily exceeded by profits generated in North America that, as discussed previously, are projected to remain robust.

Ford nonetheless has some specific challenges, including the performance of its luxury Lincoln brand that historically was not the focus of the Company under its “One Ford” strategy. However, Ford is now placing added emphasis on Lincoln with a planned significant product offensive that includes the launch of the new MKZ model later this year. While initial press reaction to the model has been positive, DBRS notes that competition is fierce with the significant majority of players very well entrenched in the luxury segment.

DBRS also notes that the Company’s market position in certain emerging markets, notably China and India, is somewhat weak, partly reflective of Ford’s relatively late entry into these markets, which are nonetheless expected to account for a significant proportion of global industry growth going forward.

However, these challenges remain more than offset by Ford’s substantial progress in its core North American operations that are expected to generate ongoing solid profitability. DBRS expects the Under Review with Positive Implications status to be resolved within the next two to three months, with the Company’s ratings possibly migrating to investment-grade territory.

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

The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.