DBRS Confirms Ford Motor Company Issuer Rating at B (low), Trend Changed to Stable

DBRS has today confirmed the ratings (see below for details) of Ford Motor Company (Ford or the Company) and changed the Trends to Stable from Negative. The rating actions reflect positive developments at the Company’s dominant North American operations, which has reduced downside risk to the rating. Ford has significantly lowered its losses, achieved better pricing and structural cost reduction, and has signed a new contract with the United Auto Workers (UAW) that should help to improve its cost position. However, Ford North America (Ford NA) is still incurring large losses, and it is uncertain that Ford NA would be able to maintain its positive momentum as the US automobile market is showing signs of softening. DBRS notes that continuing improvement in Ford NA’s operating results could lead to positive rating actions. Concurrently, DBRS has also confirmed the ratings of Ford Motor Credit Company and Ford Credit Canada Limited while changing the trends to Stable from Negative. (Ford Credit’s ratings continue to reflect the one rating differential between the credit company and the parent company.)

The Company announced on November 3rd, 2007 a tentative agreement on a new four year contract with the UAW. DBRS deems the ratification of the contract, announced on November 14, 2007, to be a very positive event. (1) The ratification has removed a significant risk to Ford of a potentially crippling labour disruption. (2) Ford and the UAW have negotiated a new Job Security Program (JSP) to allow the Company additional operating flexibility to align employment levels with market demand. In addition, all new hires, up to a maximum of 20% the of total US hourly workforce, will be at a new entry level wage and benefits that is much lower than that of existing hourly employees. (Furthermore, in the case of two component plants, all personnel can be incrementally hired at the entry level wage.) (3) A union-managed Independent VEBA Trust – expected in early 2010, will take over the retiree healthcare liabilities and should improve Ford NA’s cost position. The entry level wage agreement and independent VEBA trust help significantly narrow the labour cost gap with the Asian competitors.

DBRS notes that the operating performance of Ford’s automotive business is starting to reflect the benefits from the turnaround initiatives. In the first nine months of 2007, all segments had reported better period over period results, and all geographical segments were profitable except Ford North America (Ford NA), its dominant operation. The improvement in operating performance is above DBRS’ expectation. However, the Company’s business and financial risk profiles remain weak. Ford NA has continued to report sizeable losses and cash outflow. Ford NA has not been able to stabilize its market share. (Ford NA’s decision to reduce its exposure to the unattractive daily rental channel has contributed to the decline in 2007.) Despite Ford NA’s efforts to reduce capacity over the last few years, capacity utilization remains below industry peers because sales declines have outpaced capacity reduction, although DBRS notes that this concern has moderated somewhat with the new UAW contract.

Moreover, recent market developments have also worked against the Company. High gasoline prices have shifted consumer preference away from large SUVs and pickup trucks, Ford’s strength, to more fuel efficient vehicles. A softening U.S. economy, caused by a weakness in the residential housing sector, has slowed automobile demand, particularly for pickup trucks. Worsening conditions in the residential mortgage market are likely to prolong the slump in the housing sector, which is likely to delay any recovery in the automotive sector. This makes it more difficult for the Company to stabilize its share. (The decline in truck sales has a more severe impact on the Company’s earnings because trucks are more profitable.) The Company has accelerated its product introduction to address the weakness: 70% of the Ford, Lincoln and Mercury products have been targeted to be either new or significantly upgraded by the end of 2008. Although some of the new products (crossover vehicles) have been well received, it is still uncertain that Ford NA will be able to reverse the declining trend in market share and volume sales.

The Company continues to have a strong balance sheet and remains virtually debt free. The Company raised about $12 billion in December 2006 to further boost its cash position. In addition, proceeds from divesting non-core assets (such as Jaguar and Land Rover) would also add to liquidity.

Even though the Company expects a large cash outflow (up to $14 billion, including $5 billion in accelerated subvention payments) to fund operating losses and restructuring initiatives through to 2009, DBRS believes the Company should have no problems meeting its operating needs including funding the Independent VEBA trust. The Company’s balance sheet and liquidity position is expected to weaken but liquidity is not a concern at this point. However, an extended delay in returning to profitability could put the Company’s liquidity position at risk. This is because the Company has limited assets available to be monetized after using almost all of its assets as collateral to support the secured debts.

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

Ratings

Back to top