(This is a correction to a release issued earlier today. It corrects the senior unsecured rating for Ford Credit Co S.A. de CV.)
Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Ford Motor Company (Ford) and Ford Motor Credit Company LLC (Ford Credit) to 'B-' from 'B'. The Rating Outlook remains Negative. The downgrade reflects the following:
--The further deterioration in Ford's U.S. sales as a result of economic conditions, an adverse product mix and the most recent jump in gas prices;
--Portfolio deterioration at Ford Credit and heightened concern regarding economic access to capital to support financing requirements; and
--Escalating commodity costs that will remain a significant offset to cost reduction efforts.
Negative cash flows and declining liquidity at Ford's automotive operations will accelerate in the second half of 2008, but liquidity is expected to be sufficient through 2009 to finance operating losses, working capital drains and restructuring efforts even in the event that 2009 industry sales remain flat with deeply depressed 2008 levels.
Liquidity has declined sharply from $36 billion at year-end 2007 to $26 billion at the end of the second quarter, in part due to the $4.5 billion funding of the UAW healthcare VEBA. Maturities are moderate over the next three years, and Ford maintains access to an $11.5 billion revolving credit facility (maturing in 2011). Although the size of the facility could shrink modestly over the next several years commensurate with a declining borrowing base, unused capacity provides a liquidity cushion in the event the North American market downturn is longer or deeper than projected. Ford has moderated its growth in debt through a cash contribution to fund its initial VEBA agreement, and several cooperative equity-for debt swaps. Recent actions regarding equity dilution improve the likelihood and amount of potential equity-linked, capital-raising efforts.
Fitch's IDR for Ford Credit is the same as that of Ford, given the close business relationship between the two companies. Fitch notes that while Ford and Ford Credit have a profit maintenance agreement in place, Ford Credit did not enforce the agreement in the second quarter and Fitch does not attach any importance to this agreement since it lacks third party creditor rights. Fitch is maintaining its two notch differential between the Ford Credit's IDR and senior debt due to Fitch's continued view of ultimate recovery between 71%-90%, although Fitch believes potential recoveries are at the lower end of this range. Fitch remains concerned with increasing default rates and higher severity of losses on retail and lease contracts. The company's second-quarter loss was primarily the result of a $2.1 billion residual value impairment. While this reflects the rapid deterioration in residual values to date, particularly for truck and SUVs, FMCC may incur incremental impairments if residual values continue to decline. As a result of these factors, Fitch does not anticipate that Ford Credit will pay dividends to Ford. Further deterioration in loan and lease portfolios, or in performance of auto loan securitizations, could further limit Ford's ability to provide competitive financing. Lack of economic access to the securitization market, resulting from weaker loan performance and/or nervous capital markets, could result in a review of the rating.
The most recent spike in gas prices has resulted in plummeting U.S. industry sales and sharply declining residual values of SUV's and pickups. Ford has been actively cutting production in an attempt to manage inventories and incentive levels, but cost reductions have not been able to keep pace. A pull back from leasing, although potentially prudent in the long-term, will result in a further step-down in sales volumes and production as higher incentives or third-party financing are unlikely to fill the gap in the short term.
Second-quarter deliveries fell 17% in North America, leading to a 25% sales decline. At the smaller end of its product lineup, sales volumes of the Focus, Fusion and Escape have held up relatively well. Ford's European operations continue to perform well, with healthy growth in profitability driven by well-received product introductions and cost improvements, although weakening economic conditions are expected to moderate near term results. Ford has also benefited from strong growth in its Latin American markets. Improving quality has also been a positive.
The rise in commodity costs has been a well-known contributor to margin deterioration for the past several years, limiting the impact of Ford's extensive cost-cutting efforts. Fitch had expected commodity cost increases to moderate in 2008, allowing more of the restructuring benefits to be realized, but this has not been the case. Due to surcharges being implemented across a number of products, the flow-through of price increases in oil-based products and the timing of contract renewals, the impact of commodity price increase is expected to sharply accelerate over the next 18 months.
Factors that could result in a downgrade include:
--An expectation by Fitch that Ford's cash level would fall below $12 billion.
--Lack of economic access to the securitization market.
--Lack of execution on near-term cost, margin and product plans
In 2010, Ford is expected to realize the benefits from the UAW healthcare agreement, as well as an eventual upturn in U.S. industry sales. Ford remains highly exposed to the pickup truck market, and is unlikely to reverse negative cash flows until the U.S. pickup truck market reverses -- at which point Ford will have its updated F-Series product on the market. Ford also provided details on its longer-term product plans for the U.S., with an aggressive push into smaller vehicles through plant retoolings and the introduction of six European products into the United States. Risks remain that these products will not be well received, but early reviews of the Fiesta (coming to the U.S. market in 2010) and product commonality/manufacturing experience should reduce production risks.
The following rating actions have been taken:
Ford Motor Co.
--Long-term IDR to 'B-' from 'B';
--Senior secured credit facility to 'BB-/RR1' from 'BB/RR1';
--Senior secured term loan to 'BB-/RR1' from 'BB/RR1';
--Senior unsecured to 'CCC+/RR5' from 'B-/RR5'.
Ford Motor Co. Capital Trust II
--Trust preferred stock to 'CCC/RR5' from 'CCC+/RR6'.
Ford Holdings, Inc.
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'CCC+/RR5' from 'B-/RR5'.
Ford Motor Co. of Australia
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'CCC+/RR5' from 'B-/RR5'.
Ford Motor Credit Company LLC
--Long-term IDR to 'B-' from 'B';
--Short-term IDR at 'B';
--Senior unsecured to 'B+/RR2' from 'BB-/RR2';
--Commercial paper at 'B'.
FCE Bank Plc
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'B+'/RR2' from 'BB-/RR2';
--Short-term IDR at 'B';
--Commercial paper at 'B';
--Short-term deposits at 'B'.
Ford Capital B.V.
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'B+/RR2' from 'BB-/RR2'.
Ford Credit Canada Ltd.
--Long-term IDR to 'B-' from 'B';
--Short-term IDR at 'B';
--Commercial paper at 'B';
--Senior unsecured to 'B+/RR2' from 'BB-/RR2'.
Ford Credit Australia Ltd.
--Long-term IDR to 'B-' from 'B';
--Short-term IDR at 'B';
--Commercial paper at 'B'.
Ford Credit de Mexico, S.A. de C.V.
--Long-term IDR to 'B-' from 'B'.
Ford Credit Co S.A. de CV
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'B+/RR2' from 'BB-/RR2'.
Ford Motor Credit Co. of New Zealand
--Long-term IDR to 'B-' from 'B';
--Senior unsecured to 'B+/RR2' from 'BB-/RR2';
--Short-term IDR at 'B';
--Commercial paper at 'B'.
Ford Motor Credit Co. of Puerto Rico, Inc.
--Short-term IDR at 'B'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Mark Oline, +1-312-368-2073 (Chicago)(Ford Motor Co.)
Nathan
Spunt, +1-212-908-0202 (New York)(Ford Motor Co.)
Vincent Arscott,
CFA, +1-212-908-9172
(New York)(Ford Motor Credit Co.)
Christopher
D. Wolfe, +1-212-908-0771
(New York)(Ford Motor Credit Co.)
Brian
Bertsch, +1-212-908-0549
(Media Relations, New York)
