Published May 22, 2012
Moody’s Investors Service tipped its hat to what it called Ford Motor’s (F) “sound operating and financial disciplines” and raised the Detroit automaker’s credit rating to “investment grade” on Tuesday, citing strength in North America and a robust liquidity position.
The ratings company raised the senior unsecured ratings of Ford Motor to Baa3 from Ba2 and Ford Motor Credit Company to Baa3 from Ba1. It also withdrew probability of default ratings and returned all collateral – including the company’s coveted Ford Blue Oval trademark – that it pledged at part of a $23.5 billion loan the company took in 2006 to fund its turnaround.
“When we pledged the Ford Blue Oval as part of the loan package, we were not just pledging an asset. We pledged our heritage,” Ford’s executive chairman, Bill Ford, said in a statement. “The Ford Blue Oval is back where it belongs with the Ford family of 166,000 employees around the world.”
The announcement comes just weeks after Fitch Ratings upgraded Ford to investment grade.
The key factor behind Moody’s decision was whether Ford would be able to sustain its strong performance in the long term. In a statement, Moody’s senior vice president, Bruce Clark, said the improvements Ford has made are “likely to be lasting.”
One of Ford’s strengths is its low North America breakeven level, Moody’s said. While the company has operations all around the world, the region has been called the “engine” of its operational growth by CEO Alan Mulallay.
The lower the breakeven level the better, as it allows for Ford to sell fewer cars to break even, which ultimately raises the chances of the company growing its profit if sales are higher.
Since 2009, restructuring of the U.S. auto industry and adoption of a new United Autoworkers labor agreement has allowed Ford’s North American breakeven level to decline by 45% to 1.8 million units from 3.4 million.
Over a 12-month period ended in March, Ford’s wholesale shipments in North America were 50% above its estimated breakeven point. That wide margin, combined with an improving outlook on U.S. auto demand and the $6.2 billion in segment profits posted by Ford north America in 2011, reflect a “healthy and sustainable business position,” Moody’s said.
“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,” Moody’s said.
Of course, major challenges remain, particularly its high exposure to the depressed European auto market and its still modest position in Asia, particularly China, which is the largest auto market in the world.
“Ford has a small position in the large and strategically important Chinese auto market,” Moody’s said. “Expanding its operations in this region represents the most significant long-term challenge facing the company.”
With 25% of Ford’s global revenues generated in Europe, the company forecasts losses in the range will range between $500 million and $600 million in 2012, after breaking even in 2011.
However, Moody’s said that compared with Fords rivals in Europe, it runs a fairly efficient business – near 90% capacity utilization. It can also use its excess cash and growing North American business to offset downside risks there.
Ford has grown its liquidity position, which Moody’s said helps contend with stress. The automaker had $32 billion gross liquidity, $23 billion of which was in cash, as of the end of March.
It has also managed to match production levels to retail demand, limited the use of promotions and price discounting and capitalized on global vehicle platforms, according to Moody’s. In March, Ford paid its first dividend in six years.
“Moving forward, we will continue to focus on driving profitable growth for all of our stakeholders,” Mulally said. “We are confident that, by staying focused on our plan and working together, we will maintain strong investment grade ratings through all economic cycles.”
The ratings company said Ford will have to demonstrate clear progress in expanding its global footprint – particularly in Asia – and turn around in European business in order to win another ratings bump.