Markets & Finance

S&P Cuts Credit Rating on Ford


On Nov. 12, Standard & Poor's Ratings Services lowered its credit ratings on Ford Motor (F) and all related entities, including Ford Motor Credit and Hertz, to BBB-, one notch above junk status, from BBB. The short-term ratings were also lowered, to A-3 from A-2. The rating outlook is now stable. The Dearborn, Mich.-based auto maker had $180 billion of consolidated debt outstanding as of Sep. 30, 2003.

"Ford's profitability and cash flow remain poor, and Standard & Poor's believes that only limited improvement will be achievable over the next few years," wrote analyst Scott Sprinzen in a report. The ratings downgrade was widely expected (See BW Online, 10/22/03, "Another Jarring Bump for Ford").

In a report, Sprinzen says Ford's global automotive operations are expected to be nominally breakeven on a pretax basis in 2003, before special items. However, the year-to-year improvement over 2002 is magnified by a significant reduction in accruals for warranty and recall expenses and by the exclusion of a large charge related to further restructuring actions needed in Europe, he notes.

Standard & Poor's expects Ford's automotive cash flow in 2003 to be only about breakeven (after capital spending and before pension contributions, tax refunds, and dividends from Ford Credit).

Ford Credit is expected to report record profitability this year, but from an analytic perspective, its year-to-year improvement over 2002 is magnified, by a significant reduction in accruals for credit losses -- notwithstanding persisting high charge-offs -- and by accounting effects related to derivatives, Standard & Poor's says.

Standard & Poor's believes there will be only limited improvement in financial performance in 2004. In the U.S., cost-cutting will afford diminishing savings, but Ford's operations should benefit from cyclical strengthening of industry demand and pricing, and from ongoing product development efforts. In Europe, restructuring actions being implemented should help reduce losses from recent alarming levels.

And having achieved profitability on a full-year basis in 2003, Ford's luxury vehicle unit, the Premier Automotive Group, should be a more material contributor to earnings next year. All these developments are expected to offset moderating earnings at Ford Credit caused by a further decline in its portfolio size and expected higher interest rates, according to Standard & Poor's.

Yet, by any measure, consolidated results will remain subpar in Standard & Poor's view, particularly considering Ford's enormous use of capital. Longer range earnings prospects in the U.S. and Europe are clouded by price erosion plus ongoing proliferation of new products and the persistence of substantial excess production capacity.

Ford's financial flexibility remains satisfactory, says Standard & Poor's, owing to the large cash positions and unused committed credit facilities at the parent and at Ford Credit; the lack of material near-term, parent-level debt maturities or required pension fund contributions; and Ford Credit's ability to securitize a substantial portion of its finance assets. Yet, its extensive sources of liquidity must be weighed against Ford Credit's immense ongoing funding requirements; hence, the decision to lower the short-term rating in line with Standard & Poor's criteria.

Outlook: The rating outlook is stable. Over the next two years, even if expected improvement in earnings and cash flow should fail to materialize, and even if the company were to experience minor losses, the ratings would not necessarily be jeopardized as long as Ford maintains a large liquidity position and Ford Credit maintains satisfactory funding flexibility. From Standard & Poor's RatingsDirect


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