Ford Gets a Credit Boost: What It Means

By Markets Fool.com

Moody's said that Ford's successful launch of its new-for-2015 F-150 pickup was a factor in its decision to boost the Blue Oval's credit rating. Image source: Ford Motor Company.

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What happened: Shares of Ford Motor Company jumped 3.4% on Wednesday after Moody's Investors Service raised the Blue Oval's credit rating for the first time since 2012.

The details: On Tuesday, February 16, Moody's announced it had upgraded the long-term credit ratings of Ford Motor Company and its in-house financing arm, Ford Motor Credit Company, to Baa2 from Baa3. Baa3 is the lowest Moody's rating that is considered to be "investment grade."

Moody's said its decision to move Ford's rating up a notch reflects the progress Ford has made toward a "more competitive and sustainable operating model." Or put another way, Moody's now has a little more confidence that Ford will be able to get through the next economic downturn without too much trouble.

"The key factor in the Ford upgrade is our conclusion that the company has the operational and financial resources necessary to contend with and recover from the stress that it will eventually face," said Moody's senior vice president Bruce Clark in a statement.

Ford's very healthy cash position was probably big factor in Moody's decision. The Blue Oval had $23.6 billion in cash on hand as of the end of 2015, and another $10.9 billion in available credit lines. On the other side of the ledger, it had just $12.8 billion in debt, its lowest level in 15 years.

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What it means for Ford: It means Ford will pay a little less to borrow money from this point forward. Generally speaking, the higher a company's credit rating, the less it has to pay in interest on its bonds and financing.

It's a vote of confidence in CEO Mark Fields and the current leadership team, but beyond that, it's not really a big deal from a stock investor's perspective. Ford's credit was already "investment grade," meaning institutional investors that are limited to owning only higher-quality debt have been able to buy Ford's bonds. Ford was already paying reasonable rates on its debt.

The last time Moody's upgraded Ford, back in 2012, it was a very big deal. At the time, Moody's was the second rating agency to return Ford to investment-grade status. But the Moody's upgrade allowed Ford to recover the collateral it had pledged against the loans then-CEO Alan Mullally took in 2006.

Those loans allowed Ford to continue new-product development during the 2008-2009 economic crisis, and they kept the company from joining its old Detroit rivals in bankruptcy court. Simply put, they saved the company -- but at a cost: Ford had to pledge just about everything it had, including the rights to its Blue Oval trademark, as collateral in order to secure the financing. Getting all of that back was a huge milestone in Ford's turnaround.

This new upgrade isn't like that, but it's still good news for Ford and its shareholders.

What happens next: Most likely, the other credit-rating agencies will also bump Ford's credit up a notch in the near future.

Moody's, however, said further upgrades aren't likely any time soon. For further upgrades to be considered, it said it would need to see Ford boost its profit margins on its operations outside of North America, and it will need to see Ford show "resiliency" when it faces an economic slowdown in one of its key markets or some other "material operational challenge."

Moody's would like to see Ford boost its its global operating margin to somewhere around 8%. That's not an unreasonable target: It was 6.8% in 2015, up from 4.6% in 2014.

Ford is working to boost margins in Europe and Asia, and I think its global margins should rise nicely over the next couple of years if the regional economies cooperate. In the meantime, Ford's credit rating is already solidly in "boring" territory, and that's a very good thing for long-term investors.

The article Ford Gets a Credit Boost: What It Means originally appeared on Fool.com.

John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.