Ford Motor Company's credit was downgraded to junk by Moody’s Investor Services, casting doubt over the automaker's turnaround plan.
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Moody’s cut Ford’s rating by one notch to Ba1, the highest junk score, saying it expects the automaker to have weak earnings and cash generation amid its overhaul, which will take several years to take effect and cost $7 billion cash.
“Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers,” Moody’s wrote. “Moreover, these measures are likely to remain weak through the 2020/2021 period, including a lengthy period of negative cash flow from the restructuring programs.”
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The writing has been on the wall at Ford for some time. Shares of the automaker have fallen by half over the past five years at a time when the auto industry was relatively healthy. Moody's says the company is now facing challenges when conditions are “softening” and competition heaing up because of electric vehicles and “burdensome” emission standards.
Ford CEO Jim Hackett took action in May, announcing the automaker would lay off 7,000 salaried workers, or about 10 percent of its global workforce, as part of a cost-cutting measure that would save $600 million per year. Hackett also said Ford management would streamline its decision-making process.
There is at least some evidence the turnaround plan is headed in the right direction.
“Midway through this key year of action, we are pleased with the progress we are making toward creating a more dynamic and profitable business,” Hackett said in July, adding that the company’s automotive division had positive cash flow for a second straight quarter – the first time that has happened in over three years.
Despite the downgrade, the restructuring plan has a chance to work, according to Moody's, which describes the outlook for Ford's credit rating as stable.
That "reflects Moody's expectation that the initiatives being undertaken, particularly the global redesign effort and the new product rollout, will contribute to gradual improvement in the company's earnings, margins and cash generation, albeit over a number of years,” the ratings firm said.
“Ford's $23.2 billion of cash, which exceeds its debt, and its conservative balance sheet afford the company the ability to fund its product development and restructuring initiatives.”