Ford debt could be rated as junk again

San Antonio Express-News - - BUSINESS - By Molly Smith

Ford Mo­tor Co. could be close to get­ting junked again.

That’s what the bond mar­ket is say­ing. The com­pany’s debt is trad­ing like it’s spec­u­la­tive grade, as in­vestors worry about how higher steel tar­iffs and slow­ing sales will weigh on its prof­its. Ford is rated one step above junk by Moody’s In­vestors Ser­vice and two steps by S&P Global Rat­ings.

Any down­grade could be painful for bond in­vestors and the com­pany. The au­tomaker has more than $150 bil­lion of short­and long-term debt glob­ally and is one of the 15 big­gest cor­po­rate bond is­suers in the U.S. out­side the fi­nan­cial sec­tor. Hedge funds turned in their worst monthly per­for­mance in nearly three years in the first part of 2005, when Ford was cut to junk along with Gen­eral Mo­tors Co.

Bob Shanks, Ford’s chief fi­nan­cial of­fi­cer, said on an earn­ings call last month that the com­pany is com­mit­ted to main­tain­ing its in­vest­ment-grade rat­ings and doesn’t in­tend to lose that sta­tus again. The com­pany is “mov­ing with a sense of ur­gency and tak­ing proac­tive steps to re­design and re­struc­ture the busi­ness,” and over time “the mar­ket will rec­og­nize our progress,” spokesman Brad Car­roll said.

But debt in­vestors are skep­ti­cal. The ex­tra yield that money man­agers get for hold­ing Ford’s 4.346 per­cent bonds due 2026 rather than sim­i­lar Trea­suries jumped to lev­els typ­i­cal of high­yield com­pa­nies. The cost of pro­tect­ing Ford’s debt against de­fault us­ing credit de­riv­a­tives rose in Oc­to­ber to the high­est lev­els since 2012 be­fore set­tling down again. Moody’s down­graded the com­pany in Au­gust to one level above junk and said fur­ther cuts are pos­si­ble in the medium term.

“There’s a bet­ter chance than not it ends up in high yield,” said Henry Pe­abody, a port­fo­lio man­ager at Eaton Vance Corp. in Bos­ton. “It’s a com­bi­na­tion of a fairly weak strate­gic po­si­tion, less than ideal strate­gic de­ci­sions over last hand­ful of years, a smat­ter­ing of over­con­fi­dence and where we’re at in the credit cy­cle.”

Ford is fight­ing a “mul­ti­ple­front war,” Pe­abody said, cit­ing the com­pany’s slow­ing sales growth in China and higher costs in the U.S. from global trade dis­putes.

Ford fared bet­ter dur­ing the fi­nan­cial cri­sis than GM and the au­tomaker now known as Fiat Chrysler Au­to­mo­biles NV, avoid­ing bank­ruptcy and the gov­ern­ment­backed bailouts that its com­peti­tors re­ceived. But los­ing its in­vest­ment-grade sta­tus forced Ford to fi­nance it­self on a se­cured ba­sis, es­sen­tially putting ev­ery­thing from its in­ven­tory to the rights to its oval blue logo in hock.

When Ford re­claimed its in­vest­ment-grade rat­ings in 2012, af­ter it cut debt and prof­its jumped, Chair­man Bill Ford an­nounced the up­grade to em­ploy­ees on the pub­lic-ad­dress sys­tem nor­mally used for fire drills in Ford’s head­quar­ters in Dear­born, Mich.

“When we pledged the blue oval, it was enor­mously emo­tional for me per­son­ally and for my fam­ily, be­cause we weren’t just pledg­ing an as­set, we were pledg­ing our her­itage,” Ford said in May 2012. “To get that back feels won­der­ful, and this is one of the best days I can re­mem­ber.”

Now the com­pany is fac­ing dif­fi­culty again. Ford told in­vestors in July that it is launch­ing an upto-five-year over­haul that could cost it $11 bil­lion as it fo­cuses on higher mar­gin prod­ucts such as trucks and SUVs and ex­its busi­nesses that in­clude its U.S. sedans. How­ever, it has pro­vided scant de­tails on the re­struc­tur­ing plan and has yet to resched­ule an in­vestor meet­ing orig­i­nally set for Septem­ber.

In the mean­time, it’s been in talks with Volk­swa­gen AG to join forces on elec­tric and self-driv­ing ve­hi­cles, as both car­mak­ers have been la­beled as lag­ging in de­vel­op­ing tech­nol­ogy, Bloomberg re­ported Fri­day.

Strug­gling op­er­a­tions in Asia and Eu­rope prompted Ford to cut its 2018 profit fore­cast. The com­pany posted about a 50 per­cent de­cline in earn­ings for the sec­ond quar­ter, fol­lowed by a nearly 40 per­cent de­cline in the third.

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