DBRS Morningstar Assigns Rating of BB (high) with a Negative Trend to Ford’s New Senior Unsecured Convertible Notes Issuance

DBRS Limited (DBRS Morningstar) assigned a rating of BB (high) with a Negative trend to Ford Motor Company’s (Ford or the Company) new Senior Unsecured Convertible Notes (the Notes). Additionally, pursuant to “DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers” (August 2020), the Notes are assessed with a recovery rating of RR4. The Notes are of an aggregate amount of $2 billion (with initial purchasers having a 13-day option to purchase up to an additional $300 million aggregate amount of the Notes to cover over-allotments, if any) and have no regular interest (i.e., 0% interest). The initial conversion rate for the Notes is 57.1886 of Ford common stock per $1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $17.49 per share). The Notes are to mature on March 15, 2026, unless earlier repurchased, redeemed, or converted, although the Company may not redeem the Notes prior to March 20, 2024.

Ford has indicated that proceeds from the Notes will be used for general corporate purposes, including the potential repayment of debt. DBRS Morningstar notes that the Company, as with several automotive original equipment manufacturers, raised substantial indebtedness in early 2020 in response to liquidity concerns stemming from the global escalation of the Coronavirus Disease (COVID-19) pandemic. This included drawing down available (revolving) loan facilities for a total amount of $15.4 billion as well as unsecured notes issuance in an aggregate amount of $8.0 billion. As a function of a meaningful industry recovery in the second half of 2020 (H2 2020) and Ford’s favourable working capital performance (both of which exceeded DBRS Morningstar’s expectations), the Company fully repaid its corporate revolver in Q3 2020. This notwithstanding, Ford’s long-term indebtedness as of year-end 2020 was considerably higher year over year, essentially reflecting the aforementioned unsecured notes issuance. DBRS Morningstar observes that substituting the Notes for Ford’s earlier issuances (most notably those of last year) would result in a meaningful reduction in interest expense.

While prior expectations for a significant recovery this year in automotive conditions (following the 2020 supply/demand disruptions substantially attributable to the coronavirus pandemic) have been undermined by the semiconductor shortage (which is currently estimated to persist through H1 2021), global demand levels are nonetheless anticipated to trend positively over the near to medium term. Ford’s restructuring activities represent another current headwind, although the Company is beginning to reap meaningful rewards therefrom, as demonstrated by substantial progress in Ford’s migration of its portfolio toward commercial and utility vehicles, with the Company having a very favourable product cadence that includes recent/forthcoming launches of models such as the F-150, Bronco, and Mustang Mach-E

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 22, 2020; https://www.dbrsmorningstar.com/research/368670), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/366063), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of 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 22, 2020) was used to evaluate the ratings of Ford while DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) was applied to subsequently determine the ratings of Ford Motor Credit Company LLC and Ford Credit Canada Company, respectively. Subsequently, DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 2020) was applied to estimate the recovery prospects of Ford’s various security lines and assign specific instrument ratings thereto. Finally, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 2, 2020) was applied to assess the corporate structure of the Ford group of companies.

 
The last rating action on this transaction took place on May 21, 2020, when DBRS Morningstar downgraded Ford’s, Ford Motor Credit Company LLC’s, and Ford Credit Canada Company’s long-term ratings to BB (high).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: October 9, 1997

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020)
https://www.dbrsmorningstar.com/research/368670/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021)
https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 2020)
https://www.dbrsmorningstar.com/research/366063/dbrs-morningstar-criteria-recovery-ratings-for-non-investment-grade-corporate-issuers
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020)
https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships