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

DBRS Limited (DBRS) has today upgraded the long-term debt ratings of Ford Motor Company (Ford or the Company) to BBB from 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 also been upgraded to R-2M (from R-3) and BBB (from BBB (low)), respectively. The trend on all ratings is Stable. In its press release dated October 9, 2015, DBRS had indicated that Ford’s ratings would likely be subject to an upgrade upon the Company’s collective international operations (including equity income from its Chinese JVs) attaining at least break-even performance over a trailing 12-month period. As of December 31, 2015, the Company’s international operations achieved a combined pre-tax profit of $223 million. However, this is significantly bolstered by equity earnings of the Chinese JVs, which totalled $1.5 billion (up from $1.3 billion the prior year), such that Ford’s combined international operations are now materially profitable.

DBRS recognizes that the results of Ford’s international operations, excluding China, remain lackluster. However, this partly reflects ongoing sizable headwinds in notable emerging markets such as Russia and Brazil, with industry volumes in Western Europe (despite modest advances in the past two years) remaining at low levels vis-à-vis historical norms. DBRS anticipates that Ford’s international earnings will continue to trend positively amid a combination of moderate industry growth (primarily in Europe), improved product cadence and ongoing efficiency gains. Finally, regarding China, notwithstanding a considerable decline in growth last year (that appears likely to persist), it readily remains the world’s largest market, with Ford’s equity earnings (from its Chinese JVs) likely to remain at solid levels as the Company increases its presence across the country and expands its model offerings.

The above notwithstanding, North America continues to represent the significant majority of Ford’s automotive profit, with the Company generating strong regional margins amid several consecutive years of favourable industry conditions. However, while growth is expected to meaningfully moderate over the near to medium term, underlying economic and industry factors continue to suggest that aggregate volumes in North America are likely to remain at very healthy levels. Moreover, the precipitous decline in oil and fuel prices has resulted in a meaningful migration away from cars and toward light trucks (including CUVs/SUVs), with such vehicles representing 57% of total U.S. industry volumes in 2015, vis-à-vis 50% in 2013. DBRS notes that this is particularly advantageous for an OEM such as Ford, which is very well-represented in the light truck segment, where contribution margins are also considerably stronger compared with the car segments. However, despite the ongoing tailwinds in North America, DBRS also notes that the Company’s regional cost structure in any event continues to be very favourable; DBRS estimates that Ford would be able to absorb a substantial (i.e., in excess of 25%) drop in industry volumes while still remaining profitable in the region.

As has been the case for several years, Ford’s financial profile remains very solid (effectively exceeding levels commensurate with the assigned ratings), with the automotive operations having a net cash position of $10.8 billion as of December 31, 2015, and concurrent available liquidity of $34.5 billion. While shareholder distributions have meaningfully increased in recent years, DBRS notes that such outlays are readily enabled by Ford’s sizable liquidity and consistent cash flow generation.

DBRS expects the ratings to remain constant over the near term. The Company’s solid financial profile amid anticipated ongoing strong earnings in North America render a downgrade somewhat improbable. Conversely, future positive rating actions would likely be predicated upon additional gains in Ford’s international operations (such that they would represent a meaningful proportion of total automotive profit), although the sizable headwinds in various emerging markets (that are currently expected to persist in the immediate term) serve to undermine the Company’s ongoing efforts.

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

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

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.