Ford investment rating cut to just above junk

DETROIT – Moody’s Investors Service issued an alert Wednesday that it had downgraded the rating of Ford Motor Co. to just above junk status and said “the outlook is negative.”

The rating, Baa3, “is the lowest investment grade rating, one rung above speculative grade. It signifies the likelihood of a default,” a Moody’s spokesman told the Detroit Free Press.

This analysis “reflects the erosion in the company’s global business position and the challenges it will face implementing its Fitness Redesign program,” Moody’s said.

Said Ford spokesman Bradley Carroll: “Since coming through the Great Recession, Ford Motor Company has delivered year after year of solid financial results and operating cash flows,” adding, “We know we can capitalize on our strengths, bolster under-performing products and regions and disposition where we cannot make an appropriate return.”

Moody’s said negative developments affecting Ford include softening margins in North America driven by higher costs, reversal of its Chinese operations, strain in the South American operations and continued losses in Europe.

Under the fitness program, Ford will reassess all parts of its business with the goal of restructuring, contracting or exiting businesses that will not be able to generate adequate returns. Restructuring initiatives could entail $11 billion in charges with $7 billion in related cash expenditures over the next three to five years, Moody’s wrote.

A junk rating is not out of the question: “The ratings could be downgraded absent clear progress in pursuing the fitness initiatives by early-tomid-2019, with evidence the company is on a strong trajectory for recovery,” Moody’s said.

On the upside, Ford has a “highly competitive and profitable position in North America; the fitness program is targeting the major areas of weakness in the company’s business portfolio; the program is being implemented while global auto markets are reasonably healthy; and, the company has demonstrated the ability to successfully restructure operations in the past. In addition, Ford has a strong liquidity profile consisting of $25 billion in cash.”

CEO Jim Hackett has focused aggressively for the past year on his fitness plan, which Moody’s calls a “necessity. But it will take several years for material financial and operating benefits of the program to be realized,” Moody’s wrote.

Ford’s challenges, coupled with any unexpected cyclical downturn, could make things even worse.

“The prospects for an upgrade of Ford’s ratings through 2020 are very modest,” Moody’s wrote. “However, if the company is able to successfully execute the fitness program, an upgrade, over the long-term, could be possible.”

Rebecca Lindland, executive analyst at Kelley Blue Book, upon hearing the news, said “I think Ford needs to be even more transparent. Where’s their five-year plan? Fiat Chrysler has done an amazing job communicating their plan. General Motors has done a good job communicating their strategy. I can’t say I have that same clear vision from Ford.”