Moody's Boosts Ford (F) Unsecured Credit from Ba2 to Baa3; Ford Credit from Ba1 to Baa3
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Moody's Investors Service raised the senior unsecured ratings of Ford Motor Company (NYSE: F) to Baa3 from Ba2 and Ford Motor Credit Company LLC (Ford Credit) to Baa3 from Ba1. Ford's Corporate Family and Probability of Default Ratings, as well as its Speculative Grade Liquidity rating, are withdrawn.
The rating of Ford's secured credit facility is lowered to Baa3 from Baa2 in anticipation of the imminent fall away of the bank agreement's security interest. This fall away, which would be consistent with the facility's terms, would result in any outstandings being pari passu with Ford's other senior unsecured debt.
The upgrade of Ford recognizes the strength of the company's position in North America, its robust liquidity position, and our expectation that the company will continue to embrace sound operating and financial disciplines. We believe that these strengths will enable Ford to maintain an investment grade profile in the face of the sector's ongoing cyclicality and weakness in the European market.
The upgrade of Ford Credit's ratings results from the upgrade of the Ford ratings. Ford Credit's strategic importance to Ford as a provider of critical dealer and consumer auto financing, as well as Ford's explicit and implicit support of Ford Credit tie Ford Credit's ratings to those of its parent. Based on the liquidity and capital positions of Ford and Ford Credit, Moody's estimates that Ford has the capacity to support Ford Credit to a level equivalent to the Baa3 rating. Ford Credit's stand-alone credit profile remains unchanged at a mid-Ba level.
The rating outlook for both Ford and Ford Credit is stable.
RATINGS RATIONALE
Bruce Clark, senior vice president with Moody's said, "The key factor in our considering an investment-grade rating for Ford was whether or not the company would be able to sustain its strong performance. We concluded that the improvements Ford has made are likely to be lasting."
Moody's notes that one of Ford's key strengths is its low North American breakeven level. The rating agency estimates that since the 2009 restructuring of the US auto industry and the adoption of a new UAW labor agreement, Ford's North American annual breakeven level has declined by approximately 45% from 3.4 million units to 1.8 million units. Moreover, for the last twelve months through March 2012, Ford's North American wholesale shipments were 50% above its estimated breakeven point. This large margin over breakeven, combined with the improving outlook for US auto demand and the $6.2 billion in segment profits Ford North America generated during 2011, reflect a healthy and sustainable business position.
This sound North American business model is further supported by a product portfolio that is increasingly competitive with that of Asian OEMs. In addition, we believe that Ford will maintain a robust new product renewal program.
Importantly, Moody's believes that Ford has demonstrated its commitment to maintaining sound operating and financial disciplines by preserving a low breakeven level; matching production levels to retail demand; limiting the use of incentives and price discounting; capitalizing on the use of global vehicle platforms; and, building healthy supplier relationships.
Ford's ability to contend with stress is also supported by its strong liquidity profile. At March 2012, the company had a $32 billion gross liquidity position consisting of $23 billion in cash and over $9 billion in committed credit facilities. We estimate that after accounting for maturing debt and the minimal levels of cash needed to run the business and fund intra-period working capital requirements, Ford has approximately $20 billion in incremental liquidity that would be available to contend with stress.
The major challenges facing Ford stem from its high exposure to the depressed European auto market and the company's modest position in Asia -- particularly China. Approximately 25% of Ford's global revenues are generated in Europe and the company expects that losses in the region will be in the range of $500 million to $600 million in 2012 after breaking even during the prior year. Due to the high level of over-capacity in Europe, and the continuing uncertainty surrounding the region's sovereign and banking debt crisis, we believe that there is additional downside risk to Ford's performance in 2012 and 2013. We note, however, that compared with its mass-market OEM peers in Europe, Ford's operations are relatively efficient and are near 90% capacity utilization. Moreover, Ford's strong North American position and healthy liquidity profile are critical elements of its ability to contend with the risks posed in Europe.
Ford has a small position in the large and strategically important Chinese auto market. Expanding its operations in this region represents the most significant long-term challenge facing the company. Success in this expansion initiative and in restoring the profitability of its European operation will be necessary for Ford to establish a more balanced global footprint.
Ford Credit's high encumbered asset levels constrain its stand-alone profile. Additionally, Moody's anticipates that Ford Credit will increase its leverage in the future, though not to the level it maintained in the years prior to the financial crisis. Ford Credit is seeking to modify its funding mix to incorporate more unsecured debt issuance, which in time should cause encumbered asset levels to decline and increase its financial flexibility. Ford Credit's ratings are supported by asset quality performance that has significantly recovered since the depths of the credit crisis and pre-tax pre-provision profitability that compares with historical levels.
In order to support a positive outlook or higher rating, Ford will have to demonstrate clear progress in building profitability outside of North America. This would require a sustained turnaround of its European operations and a profitable expansion of its position in China. The company would also have to maintain its solid position in North America and a healthy liquidity profile. For the LTM through March 2012, Ford's performance (reflecting Moody's standard adjustments) included: EBITA margin of 5.4%; debt/EBITDA of 3.0x; and EBITA/interest of 3.9x. Metrics that would support a positive rating action include: EBITA margin above 8%; debt/EBITDA below 3.0x; and EBITA/interest above 5x.
Metrics that might indicate pressure on the rating include: EBITA margin below 4.5%; debt/EBITDA of approaching 4.0x; and EBITA/interest below 3.0x.
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The rating of Ford's secured credit facility is lowered to Baa3 from Baa2 in anticipation of the imminent fall away of the bank agreement's security interest. This fall away, which would be consistent with the facility's terms, would result in any outstandings being pari passu with Ford's other senior unsecured debt.
The upgrade of Ford recognizes the strength of the company's position in North America, its robust liquidity position, and our expectation that the company will continue to embrace sound operating and financial disciplines. We believe that these strengths will enable Ford to maintain an investment grade profile in the face of the sector's ongoing cyclicality and weakness in the European market.
The upgrade of Ford Credit's ratings results from the upgrade of the Ford ratings. Ford Credit's strategic importance to Ford as a provider of critical dealer and consumer auto financing, as well as Ford's explicit and implicit support of Ford Credit tie Ford Credit's ratings to those of its parent. Based on the liquidity and capital positions of Ford and Ford Credit, Moody's estimates that Ford has the capacity to support Ford Credit to a level equivalent to the Baa3 rating. Ford Credit's stand-alone credit profile remains unchanged at a mid-Ba level.
The rating outlook for both Ford and Ford Credit is stable.
RATINGS RATIONALE
Bruce Clark, senior vice president with Moody's said, "The key factor in our considering an investment-grade rating for Ford was whether or not the company would be able to sustain its strong performance. We concluded that the improvements Ford has made are likely to be lasting."
Moody's notes that one of Ford's key strengths is its low North American breakeven level. The rating agency estimates that since the 2009 restructuring of the US auto industry and the adoption of a new UAW labor agreement, Ford's North American annual breakeven level has declined by approximately 45% from 3.4 million units to 1.8 million units. Moreover, for the last twelve months through March 2012, Ford's North American wholesale shipments were 50% above its estimated breakeven point. This large margin over breakeven, combined with the improving outlook for US auto demand and the $6.2 billion in segment profits Ford North America generated during 2011, reflect a healthy and sustainable business position.
This sound North American business model is further supported by a product portfolio that is increasingly competitive with that of Asian OEMs. In addition, we believe that Ford will maintain a robust new product renewal program.
Importantly, Moody's believes that Ford has demonstrated its commitment to maintaining sound operating and financial disciplines by preserving a low breakeven level; matching production levels to retail demand; limiting the use of incentives and price discounting; capitalizing on the use of global vehicle platforms; and, building healthy supplier relationships.
Ford's ability to contend with stress is also supported by its strong liquidity profile. At March 2012, the company had a $32 billion gross liquidity position consisting of $23 billion in cash and over $9 billion in committed credit facilities. We estimate that after accounting for maturing debt and the minimal levels of cash needed to run the business and fund intra-period working capital requirements, Ford has approximately $20 billion in incremental liquidity that would be available to contend with stress.
The major challenges facing Ford stem from its high exposure to the depressed European auto market and the company's modest position in Asia -- particularly China. Approximately 25% of Ford's global revenues are generated in Europe and the company expects that losses in the region will be in the range of $500 million to $600 million in 2012 after breaking even during the prior year. Due to the high level of over-capacity in Europe, and the continuing uncertainty surrounding the region's sovereign and banking debt crisis, we believe that there is additional downside risk to Ford's performance in 2012 and 2013. We note, however, that compared with its mass-market OEM peers in Europe, Ford's operations are relatively efficient and are near 90% capacity utilization. Moreover, Ford's strong North American position and healthy liquidity profile are critical elements of its ability to contend with the risks posed in Europe.
Ford has a small position in the large and strategically important Chinese auto market. Expanding its operations in this region represents the most significant long-term challenge facing the company. Success in this expansion initiative and in restoring the profitability of its European operation will be necessary for Ford to establish a more balanced global footprint.
Ford Credit's high encumbered asset levels constrain its stand-alone profile. Additionally, Moody's anticipates that Ford Credit will increase its leverage in the future, though not to the level it maintained in the years prior to the financial crisis. Ford Credit is seeking to modify its funding mix to incorporate more unsecured debt issuance, which in time should cause encumbered asset levels to decline and increase its financial flexibility. Ford Credit's ratings are supported by asset quality performance that has significantly recovered since the depths of the credit crisis and pre-tax pre-provision profitability that compares with historical levels.
In order to support a positive outlook or higher rating, Ford will have to demonstrate clear progress in building profitability outside of North America. This would require a sustained turnaround of its European operations and a profitable expansion of its position in China. The company would also have to maintain its solid position in North America and a healthy liquidity profile. For the LTM through March 2012, Ford's performance (reflecting Moody's standard adjustments) included: EBITA margin of 5.4%; debt/EBITDA of 3.0x; and EBITA/interest of 3.9x. Metrics that would support a positive rating action include: EBITA margin above 8%; debt/EBITDA below 3.0x; and EBITA/interest above 5x.
Metrics that might indicate pressure on the rating include: EBITA margin below 4.5%; debt/EBITDA of approaching 4.0x; and EBITA/interest below 3.0x.
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