DBRS Confirms Ford Motor Company at BBB (low), Stable Trend

DBRS has today confirmed the long-term debt ratings of Ford Motor Company (Ford or the Company) at BBB (low). Concurrently, the short- and long-term debt ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary Ford Credit Canada Limited have been confirmed at R-3 and BBB (low) respectively. The ratings of Ford Credit reflect the ownership and the strategic importance of Ford Credit to Ford as a provider of dealer and consumer auto financing. Moreover, the ratings consider that the predominant share of Ford Credit’s business consists of financing Ford vehicles and supporting Ford dealers. Accordingly, the overall long-term success of Ford Credit, as a captive finance company, is highly dependent on the success of Ford, the parent. As such, DBRS views Ford Credit’s relationship with and reliance on its ultimate parent as a key rating factor, thereby the ratings are linked. The trend on all the ratings is Stable.

The ratings continue to reflect Ford’s sound business risk profile that remains underpinned by its solid market position in its core North American market. This notwithstanding, DBRS notes that the Company’s business profile assessment is constrained by Ford’s current overdependence on its home market for earnings, with the Company’s international operations remaining relatively modest and on a combined basis incurring a substantial loss over the past 18-month period ending June 30, 2013. Regarding the financial risk profile, DBRS notes that Ford’s financial position has progressively improved in line with the significant overall profitability of its automotive operations over the past three and a half years. Balance sheet metrics are well consistent with the assigned ratings while income- and cash flow based-measures are strong, effectively exceeding levels commensurate with the current ratings.

Ford continues to generate very solid results in North America. The Company has maintained its leadership position in the pick-up truck segment through ongoing strong sales of the F150 (expected to be renewed next year). Additionally, last year’s revisions of the Escape compact utility vehicle (CUV) and Fusion midsize car have fared very well since their respective launches. Ford has also meaningfully diversified its product portfolio to now include solid representation in the small car segment where sales have increased significantly year-over-year in line with growing sales and strong market reception to the Fiesta and the new C-MAX. Persistent pricing gains and higher equipment levels across the Company’s product portfolio have 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. DBRS notes that the Company’s operating margin in North America over the eighteen-month period ending June 30, 2013, exceeded 10%, which is very strong for the automotive industry.

While the recent product momentum is significant, DBRS notes that the profitability of Ford’s North American segment also largely reflects the now-favourable cost position of this segment, with break-even production estimated at industry volumes significantly below actual levels (based on current market share). DBRS projects that U.S. industry sales will reach approximately 15.5 million units this year, with volumes in 2014 likely reverting to levels above 16 million units. However, in the event that this growth is derailed by potential economic headwinds, DBRS notes that Ford North America could absorb a meaningful contraction in U.S. industry volumes and still be materially profitable.

Amid all the positive developments in North America, DBRS notes that the slow progress of Lincoln is a weak point for the Company. Ford is attempting to address this through several planned product launches for this luxury brand. The Company’s all-new MKZ, the first component of a major product offensive for the Lincoln brand, was initially hindered somewhat by launch difficulties that impacted the model’s availability upon its introduction. However, once these initial supply issues were resolved, MKZ sales have been strong, with the model also receiving mostly favourable reviews from the collective automotive press, including the award of best compact premium vehicle according to J.D. Power’s APEAL study of August 2013. While the sales performance of the MKZ has thus been encouraging, DBRS notes that the introduction of additional models, most likely commencing with the MKC CUV, is also critical in generating ongoing product momentum as Lincoln will eventually require several successful models to ensure its long-term viability as a premium automotive brand. Moreover, Ford will also attempt to grow Lincoln outside the United States through the planned introduction of the brand in China in 2014. DBRS notes, however, that the growth rate of the Chinese automotive industry has recently moderated. Moreover, pricing for premium vehicles, which historically was very strong in the country, has also softened considerably.

Despite the solid profitability in North America, Ford’s business profile strength is undermined by its lackluster results across other major geographic markets, of which Europe remains the most problematic as the Company’s European segment incurred a loss of $1.8 billion in 2012. Ford is in the midst of a substantial restructuring of its European operations, with the Company recently closing the Southampton assembly plant as well as the Dagenham stamping and tooling facility in the United Kingdom. Ford is also planning to close its Genk, Belgium assembly facility by the end of 2014. In addition to the above-cited cost reduction measures the Company is undergoing a concerted product offensive aimed at bolstering its revenue base in the region. Initial indications would appear somewhat promising as Ford’s latest models have been well received in the market, with its European retail share improving year-over-year, (although this partly reflects the Company’s favourable country mix in the continent with the U.K. - where Ford is traditionally relatively strong- faring relatively well vis-à-vis other European markets). However, DBRS notes that the Company’s obstacles in the region remain very significant, with industry volumes in many markets, particularly in Southern Europe, at their lowest levels in over two decades. While it would appear that the regional auto industry will likely bottom out in 2013, DBRS expects the recovery in Europe to prove very protracted. Accordingly, the performance of this segment will likely remain quite weak over the near-term, with European losses in 2013 projected by the Company to persist at last year’s levels of roughly $1.8 billion. While losses are subsequently expected to narrow, Ford’s target of returning to profitability in the region by mid-decade may prove quite challenging.

In other international markets, the progress of Ford South America’s operations has been impeded by foreign exchange headwinds as well as by volatilty in the region associated with changing economic policies and changing trade policies. In Asia-Pacific and Africa, while the Company is a relatively late entrant, Ford is now investing significantly to bolster its presence in the region with four plants opening recently and an additional six facilities under construction. While this segment’s pre-tax earnings (forecasted by the Company to be profitable for 2013) over the near-term will be constrained by high investment levels, over the medium to long term Ford is targeting to generate significant profitability in this geographic segment, which is slated to account for the majority of the automotive industry’s global growth going forward.

In line with the Company’s solid profitability in recent years, Ford has consistently strengthened its financial risk profile, which is now well consistent (and in certain areas even exceeds) with the assigned ratings. As of June 30, 2013, Ford’s automotive operations enjoyed a net cash position of about $10 billion, with available liquidity ample at about $37 billion. The Company reinstated dividends to common stockholders in 2012 with an annual dividend of 20 cents per share (translating to an aggregate payment of approximately $800 million); earlier this year Ford increased the annual dividend to 40 cents per share. The Company has also been taking measures to progressively de-risk its various pension plans. In 2012, the Company made $3.4 billion in cash contributions (including $2 billion in discretionary contributions) to its global pension plans, with planned contributions in 2013 rising to $5 billion (including $3.4 billion in discretionary contributions). DBRS notes that Ford’s strong balance sheet / liquidity position as well as its solid cash generation in recent years enables the Company to readily absorb such financial initiatives.

The Stable trend incorporates DBRS’s expectation that the ratings are likely to be constant over the near-term, with ongoing solid performance in North America more than offsetting weakness across the Company’s international operations. While the North American economy continues to face certain potential 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. Should the Company’s positive performance momentum persist and Ford demonstrates significant progress in its international operations (primarily Europe), as well as an ability to successfully turn around Lincoln, the ratings could be subject to positive action.

Notes:
All figures are in US dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry (August 2013), which can be found on our website under Methodologies.

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