DBRS Confirms Ford Motor Company at BBB, Trend Changed to Negative from Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and long-term debt ratings of Ford Motor Company (Ford or the Company) at BBB. Concurrently, DBRS confirmed the short- and long-term debt ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary Ford Credit Canada Company at R-2 (middle) and BBB, respectively. The confirmations reflect Ford’s sound business risk assessment as a major global automotive original equipment manufacturer with a notably strong competitive position in full-size pickup trucks. The trend on the ratings has been changed to Negative from Stable, reflecting the Company’s materially weaker operating performance. Moreover, Ford faces meaningful challenges over the near to medium term as it undertakes a sizeable restructuring (the Restructuring), with conditions across selected key markets remaining somewhat uncertain.

The Company’s 2018 industrial earnings were considerably lower year over year as positive market factors (substantially consisting of firmer product mix and favourable net pricing) were readily outweighed by negative factors that included higher commodity costs (exacerbated by imposed tariffs), increased warranty expenses, lower equity and royalty income (reflecting weaker operating performance in China) and adverse foreign exchange developments. By geographic segment, Ford’s earnings in North America, which continues to effectively dominate its automotive performance, softened but remained at solid levels, generating a regional adjusted EBIT margin of 7.9%. However, performance across the Company’s international segments markedly declined, incurring a combined adjusted EBIT loss of approximately $2.2 billion (compared with essentially breakeven performance the prior year). Ford’s weaker international performance primarily reflects losses in Asia Pacific, followed by Europe.

Acknowledging the ongoing decline in financial performance, the Company outlined its planned Restructuring, currently estimated by Ford to span five years (ending 2023, albeit with the majority of actions to take place over the next few years) and result in EBIT charges of potentially up to $11 billion (with cash-related effects of $7 billion). Key aspects of the Restructuring include: a revision of the Company’s manufacturing footprint (the majority of changes to occur outside of North America); increased platform consolidation/component sharing; a shifting of Ford’s vehicle portfolio to further emphasize sport utility vehicles, pickup trucks and commercial vehicles; and substantial investments in autonomous and electrified vehicles. The Company will also undertake a reorganization of its global salaried workforce and seek additional alliances/partnerships with other OEMs; (Ford recently announced memoranda of understanding with Volkswagen AG and Mahindra Group). While DBRS views positively the measures cited in the Restructuring, it also notes that the Restructuring entails significant execution risk that could undermine the recovery of Ford’s financial metrics to recent historical levels. Moreover, recognizing market headwinds in China (where annual automotive industry sales in 2018 declined for the first time in two decades) and Europe (where regional volumes are estimated to trend from roughly flat to moderately lower levels amid ongoing political challenges across several constituent markets), Ford’s targeted improvement in these two regions remains subject to meaningful uncertainty.

In line with the trend change to Negative from Stable, a further decline in earnings amid substantially negative free cash flow generation (both on an adjusted basis reflecting the Restructuring) would likely lead to a downgrade. Conversely, improved profitability, likely to be evidenced in North America (in line with Ford’s planned product offensive in the region) and bolstered by reduced losses in Asia Pacific, could result in the trends on the ratings being changed to Stable.

DBRS notes that the above press release was amended on January 23, 2020, to remove an unnecessary disclosure. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018) was utilized to evaluate the ratings of Ford Motor Company, with DBRS Criteria: Guarantees and Other Forms of Support (January 2019) being applied to subsequently determine the ratings of Ford Motor Credit Company LLC and Ford Credit Canada, respectively.

The last rating action on this transaction took place on February 23, 2018.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Date: October 9, 1997

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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