Ford's Bonds Crushed on Moody's Downgrade to One Notch Above Junk

Ford bonds are down 4% after being downgraded to one step above junk. Moody's outlook is negative.

Yesterday, the Detroit Free Press reported Ford Investment Rating Cut to One Notch Above Junk.

>The Moody's analysis said it "reflects the erosion in the company's global business position and the challenges it will face implementing its Fitness Redesign program."

>Ford spokesman Bradley Carroll issued a statement within minutes that said, Since coming through the Great Recession, Ford Motor Company has delivered year after year of solid financial results and operating cash flows. The company has a strong balance sheet, which provides financial flexibility. We know we can capitalize on our strengths, bolster underperforming products and regions and disposition where we cannot make an appropriate return. Were confident that as we do, the market will recognize our progress.

Strong Balance Sheet?

Link: Nasdaq.Com

Moody's Downgrade, Outlook Negative

Inquiring minds may wish to read Moody's downgrade analysis: Ford Ratings Cut to Baa3; Outlook is Negative.

>Ford's negative outlook recognizes the significant challenges of effectively executing the full scope of the Fitness program, and the extended time period over which material benefits might be achieved. In addition, the considerable financial and managerial resources devoted to the Fitness program will reduce Ford's ability to contend with any unexpected cyclical downturn.

>The ratings could be downgraded absent clear progress in pursuing the Fitness initiatives by early to mid-2019, with evidence that the company is on a strong trajectory for recovery. The rating could also be lowered if Ford is unable to address operational inefficiencies in each of its major regions, while at the same time showing progress under the Fitness program's objective to generate adequate returns across all aspects of its automotive business. Evidence of such improvement could be reflected in the following areas: 1) North America: achieving an EBIT margin above 8%, maintaining market share of at least 14.5%, and lowering the breakeven level; 2) China: successfully launching new products that help grow market share, improve dealer relationships and restore historic levels of profitability; and 3) consolidated automotive operations: making steady progress toward restoring positive free cash flow.

>The prospects for an upgrade of Ford's ratings through 2020 are very modest. However, if the company is able to successfully execute the Fitness program, an upgrade, over the long-term, could be possible. This would require achieving a 10% EBIT margin in North America, and re-establishing its former competitiveness and profitability in China. Metrics that could support an upgrade include: a consolidated automotive EBIT margin approaching the high single digits, and sustainable above 8%; debt/EBITDA below 2.75x, and EBITA/interest 5.0x

What About GM?

GM's debt was wiped out in its 2011 bankruptcy. What did GM do?

Link: Nasdaq.Com

Ford vs GM Share Price

If Ford is downgraded to Junk, there are many "investment grade" bond funds that will have to dump it. I expect that to happen, and that is what the "negative" outlook by Moody's suggests.

Mike "Mish" Shedlock

Comments (12)
No. 1-7
Bam_Man
Bam_Man

Dr. Harald Malmgren's take on the future of the US/global auto industry. Very interesting!

2banana
2banana

Coming soon to GM and Chrysler. Again.

And no obama illegal bailouts waiting in the wings this time either.

Ford didn't take the bailout when offered and I give them much credit for that.

thimk
thimk

BAm_Man excellent synopsis. If you want to buy a car with mostly us labor/parts , buy Toyota/Honda. If china boycotts GM cars(made in china) GM is in a world of hurt. like wise ford. Oh in the US uber is in , new car out.

Six000mileyear
Six000mileyear

There has been some reluctance for Ford to buy back shares; however, in 2016 and 2017 Ford made special dividend payments totaling more than $5.2B, which made no sense due to large amounts of outstanding debt.

channelstuffing
channelstuffing

In a world with end less money printing and everything is too big to fail does it matter?lol,soaring costs,soaring prices,lots packed tight and you try sellin 100 grand pickups in an economy where half the population depend on a "check" from big gov't 1st of every month.

Sechel
Sechel

in 2006 then CEO Alan Mulally mortgaged all of the company's assets, borrowed a ton of money which gave it a cushion to weather the crisis that pushed G.M. into bankruptcy. And while Mulally instituted some positive management changes long term structural problems remained and Ford has now gotten out of cars except for selling some Mustangs. Mulally is gone and they haven't figured out how to sell product and have withdrawn to their Maginot line trucks and SUV'S.

AMC couldn't survive strictly as a builder of Jeeps and I suspect Ford without cars will ultimately have the same fate.

PodUK
PodUK

Oy, amateur mistake. You are looking at the consolidated balance sheet, which collapses the automotive (industrial) balance sheet with the finance company (bank) balance sheet. You need to look at the automotive cash and the automotive debt. Most of the debt on the consolidated statements is collateralized by sold and leased vehicles, and you are not considering the value of those assets. Yeah, I know, in a downturn there will be loan and lease losses, but that is a different discussion. The balance sheet is not as bad as you are indicating. Take a look at the "finance comany using equity-method" statements in the 10K. I know what I am talking about and am no fan of the Big Three, in fact I made my career being their foil.