Ford rating cut to junk as Moody’s doubts turnaround bid

Automaker’s cash flow and profit margins below expectations and likely to remain weak

Ford was dealt a blow by Moody’s Investors Service, which cut the carmaker’s credit rating to junk on doubts that a turnaround plan by chief executive officer Jim Hackett will generate earnings and cash quickly enough.

Moody’s downgraded Ford to the highest junk rating, Ba1, saying the automaker’s cash flow and profit margins are below expectations and likely to remain weak over the next two years. The descent to junk status affects one of the largest corporate bond issuers in the U.S. outside the financial sector.

Investors have traded Ford’s debt for roughly the past year at levels that implied the company was headed for junk. Hackett has struggled to win over Wall Street with an overhaul that includes cutting thousands of jobs, reviving an aging line of SUVs and ditching slowselling sedans.

“It’s a pretty precarious situation that they’re in,” Charlie Chesbrough, senior economist of Cox Automotive, said by phone. “When a company gets a junk status rating, it will mean they have to pay a higher interest rate and it means a lot of institutional investors will have to think twice.”

Ford’s most actively-traded bonds, Ford Motor Credit Co.’s 5.113 per cent bonds due 2029, weakened relative to Treasuries Monday afternoon after Moody’s issued its release.

The extra yield, or spread, the notes pay widened 0.3 percentage point to 3.45 percentage points, according to Trace. The automaker’s shares were down 3 per cent at $9.25 (U.S.) in Tuesday premarket trading.

“Ford remains very confident in our plan and progress,” the carmaker said in an emailed statement. “Our underlying business is strong, our balance sheet is solid and we have plenty of liquidity to invest in our compelling strategy for the future.”

Ford of Europe president Stuart Rowley said in an interview at the Frankfurt auto show Tuesday that, while “obviously we’re disappointed” with the downgrade, the company doesn’t expect it to hurt business in the near term and that financially it’s “very well positioned” to proceed with reorganizing its operations in the region.

It’s not the first time that Ford carried a high-yield rating: The company and its peer General Motors were downgraded to junk by S&P Global Ratings in 2005. Moody’s and Fitch Ratings followed suit later that year.

But unlike GM and Chrysler, Ford managed to avoid bankruptcy and government bailouts.

Still, losing investment-grade status forced Ford to finance itself by essentially putting everything in hock, from its inventory to the rights to its blue oval logo. Chair Bill Ford described the predicament as “enormously emotional,” saying the founding family was “pledging our heritage.”

When the company reclaimed its investment-grade ratings in 2012, Bill Ford said it was “one of the best days I can remember.”

S&P Global Ratings and Fitch Ratings have a BBB rating on Ford, which is two steps above junk. Both have a negative outlook. As long as the company has at least two ratings above junk, it’s eligible to stay in the biggest investment-grade bond indexes, which means many bond investors won’t be forced to sell all their holdings.

In July, Ford issued an annual profit forecast that disappointed investors as the automaker struggles to compete in China’s slumping car market.