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

DBRS has today upgraded the Issuer Rating of Ford Motor Company (Ford or the Company) to BBB (low) from BB. Concurrently, the Company’s Revolving Credit Facility has been confirmed at BBB (low), reflecting the release of collateral previously pledged in support thereof. As a result of Ford’s Issuer Rating attaining investment-grade status, there is no recovery analysis performed in connection with the Company’s Long-Term Debt, the rating of which has been upgraded to BBB (low), in line with the Issuer Rating. The previously assigned recovery rating has been withdrawn accordingly. Furthermore, 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 BBB (low) from BB (high), equivalent with Ford’s Issuer Rating. The trend on all ratings is Stable. With these rating actions, Ford has been removed from Under Review with Positive Implications, where it was placed on May 4, 2012.

The convergence of the ratings of Ford and Ford Credit reflects the increased symbiotic relationship between the two companies, now that both are in investment-grade territory. Moreover, when assessed on a stand-alone basis, DBRS notes that Ford Credit’s significantly encumbered balance sheet, as well as its reliance on access to wholesale funding, reinforce the alignment of the ratings. While Ford’s business profile strength remains constrained by its significant dependence on North America – with current weakness across its international operations, most notably Europe, exacerbating matters – DBRS notes that the upgrade primarily reflects the Company’s solid financial profile as denoted by the Automotive sector’s strong balance sheet (i.e., net cash position of approximately $10 billion), with income- and cash flow-based credit metrics well within investment-grade levels. Although DBRS acknowledges the significant headwinds facing the Company in Europe and, to a lesser degree, in South America, we expect this to be considerably offset by ongoing strong performance in North America, which has exceeded DBRS’s expectations and is deemed sustainable going forward, with Ford’s financial profile remaining on track.

The ratings upgrade reflects the Company’s continuously solid performance, with Ford becoming significantly profitable from 2010 through the first half of 2012. The Company’s progress in its core North American market has been impressive amid industry conditions that, while improving, remain below historical norms. Additionally, the Company’s financial profile continues to strengthen. Ford’s balance sheet has been optically restored through the release of the majority of the Company’s valuation allowance against its net deferred tax assets. Moreover, through further substantial repayments of industrial indebtedness (which totalled $6 billion on a net basis in 2011) and cash flow generation, DBRS notes that the Automotive operations had a net cash position of approximately $10 billion as of June 30, 2012. DBRS also notes that, given the Company’s consistently strong performance in recent years, income- and cash flow-based coverage measures are very solid and within levels typically associated with an “A” rating.

Ford has generated solid momentum in its core North American market. The Company’s product cadence has been strong, with model replacement rates exceeding the industry average. Moreover, new model launches have been consistently well received, significantly bolstering Ford’s brand reputation and quality image (notwithstanding recent setbacks associated with Ford’s interactive driver communication systems and dual clutch transmissions). DBRS also notes that Ford has managed to meaningfully expand its product range, with the Focus and Fiesta being very competitive in the small car segment (and achieving significant conquest sales away from other original equipment manufacturers (OEMs)). Recent/imminent product launches include the Ford Escape and Fusion – two significant models in high-volume vehicle segments. 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.

While Ford’s recent product momentum is noteworthy, DBRS notes that the Company’s profitability in North America also significantly reflects the now-favourable cost position of this segment, with break-even production levels estimated at industry volumes of about ten million units (based on current market share). DBRS projects that U.S. industry sales in 2012 will range between 14.0 million and 14.5 million units, which, while higher year-over-year, remains below historical norms. Further moderate growth is projected in 2013 and thereafter. However, in the event that this growth is derailed by ongoing economic headwinds, DBRS notes that Ford could absorb a meaningful contraction in U.S. industry volumes and still be materially profitable.

DBRS notes that the Company is currently in ongoing labour negotiations with the Canadian Auto Workers (CAW) union, with the current contract expiring on September 17, 2012. Vehicles produced at the Company’s sole remaining Canadian assembly plant in Oakville, Ontario, include the Ford Edge and Flex, along with the associated Lincoln MKX and MKT models. DBRS notes that autoworkers represent only a small proportion of the CAW’s total constituency and expects the discussions to be challenging, with the possibility of an eventual strike not unlikely. However, DBRS does not expect that such events would have a material adversely impact on Ford as its total CAW representation amounts to less than 5,000 employees (in Oakville as well as two engine assembly facilities in Windsor).

Amid all the positive developments in North America, DBRS notes that the slow progress of Lincoln has proved a weak point for the Company. Ford is attempting to expeditiously address this through several planned product launches for this luxury brand. In addition to the recently revised MKS, an all-new MKZ model will be launched this fall, to be followed by the introduction of a new Lincoln C-based model next year. Ford has also been progressively updating its Lincoln dealerships to further support the new model launches. While DBRS views the above steps positively, it also notes that competing brands in the luxury segment are very well entrenched, rendering material market share gains quite challenging. Should Lincoln fail to make significant inroads through this product offensive, Ford may have to reassess the long-term viability of the brand.

While the Company’s general turnaround in North America has been remarkable, Ford presently remains too dependent on its home market with respect to earnings. This has been underscored by the significant challenges facing Ford in Europe, where the automotive industry has long been burdened by overcapacity that has been worsened by the significant economic headwinds attributable to the region’s sovereign debt crisis. While Ford Europe’s results over the past few years have been weak, performance has recently deteriorated considerably, with the segment incurring a pre-tax loss of $1 billion over the twelve-month period ending June 30, 2012. DBRS anticipates that losses over the near term may increase further, with Southern Europe being particularly challenging as government-imposed austerity measures further inhibit economic growth. DBRS notes that the severe environment in Europe has prompted several OEMs to pursue various restructurings. Fiat S.p.A. closed a plant in Sicily last year. Moreover, PSA Peugeot Citroën and General Motors Company (which previously closed an assembly facility in Antwerp, Belgium) have also announced planned plant closures, although in Europe this is a protracted process with the anticipated shutdowns not scheduled until 2014 and 2016, respectively. Given the region’s lacklustre prospects over the medium term, DBRS expects Ford to take similar actions, although losses are nonetheless expected to persist well into next year with significant profitability unlikely over the medium term.

The Stable trend incorporates DBRS’s expectations that the ratings are likely to be constant over the near to medium term, with ongoing solid performance in North America more than offsetting weakness across the Company’s international operations. While the North American economy faces certain headwinds, DBRS notes that the rate of recovery of the automotive industry in the United States has significantly exceeded that of the overall economy. Moreover, in the event that the automotive volumes in the United States undergo a sharp downturn (which we consider unlikely), DBRS notes that Ford’s North American operations would still likely be significantly profitable given its favourable cost structure. However, should the Company’s positive performance momentum persist and Ford demonstrate significant progress in Europe, as well as an ability to successfully turn around Lincoln, the ratings could be subject to further positive action.

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

The applicable methodology is Rating Companies in the Automotive Industry (April 2011), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.