WASHINGTON (MNI) – The following is an excerpt from Standard &
Poor’s announcement Friday that it has raised its corporate credit
rating on Ford Motor to ‘BB+’ from ‘BB-‘:
Overview
* Ford Motor Co.’s (Ford) new four-year labor contract with the
United Auto Workers (UAW) has been ratified; we believe the contract
will allow for continued profitability and cash generation in North
America. Ford has a two-year track record of profits and cash flow
generation in its global automotive operations, supported by strong
performance in North America.
* We believe Ford’s global automotive operations will generate at
least mid-single-digit EBIT margins and positive automotive operating
cash flow of at least $5 billion in 2011.
* We are raising our corporate credit rating on Ford to ‘BB+’ from
‘BB-‘; and assigning a stable outlook. The ratings are removed from
CreditWatch, where they were placed with positive implications on Sept.
29, 2011.
Rating Action
On Oct. 21, 2011, Standard & Poor’s Ratings Services raised its
corporate credit rating on Ford Motor Co. and Ford Motor Credit Co. LLC
to ‘BB+’ from ‘BB-‘ and removed the ratings from CreditWatch, where they
were placed with positive implications on Sept. 29, 2011. The outlook is
stable. We also raised the counterparty credit rating on FCE Bank PLC,
Ford Credit’s European bank, to ‘BBB-‘ from ‘BB’, maintaining the
one-notch rating differential between FCE and its parent.
Rationale
The upgrade reflects our view that, among other things, Ford’s
prospects for generating free cash flow and profits in its automotive
manufacturing business remain intact, because of its cost base in North
America. Our base case assumes some improvement in light-vehicle sales
in North America into 2012. We estimate Ford’s automotive operating cash
flow (before separation payments and UAW contract costs) during 2011
will be at least $5 billion (roughly equivalent to more than 10% of our
estimate of adjusted automotive and post-retirement debt in 2011).
We also assume that Ford can sustain its pretax EBIT margin in
North America in the uppersingle-digit percentage area and in the
mid-single digit area in total for automotive and avoid large losses in
Europe. The upgrade also considers our continued assessment of Ford’s
business risk profile as fair, and its financial risk profile as
significant. Under our criteria, the combination of these profiles is
consistent within a one-notch band of a ‘BB’ corporate credit rating.
We believe the company’s automotive operations in North America
will remain profitable with industry light-vehicle sales at or even
somewhat below current levels (i.e., more than 11.5 million units). We
also believe Ford has good prospects for generating at least $2 billion
in automotive operating cash flow in 2012, even if the key U.S. auto
market does not recover significantly. But we also note that cash flow
will be sensitive to volume and cost headwinds–including commodity
prices and other cost increases–as well as future production
volatility.
These factors could temper year-over-year cash flow generation. As
the inventories of the Japanese automakers recover, we believe some
modest market share losses by many non-Japanese automakers could occur
in the U.S. over the coming quarters. We assume automakers competing in
the U.S. market will continue to demonstrate the same discipline we have
observed since late 2009 regarding the level of production and
inventories relative to sales, avoiding excess inventories and
incentives.
We believe underlying business risks remain high, most notably:
* Continuing exposure to the weak recovery in vehicle demand in key
global markets, and, in particular, the very competitive conditions in
Europe;
* The eventual return to more typical levels of industry volatility
in sales and production; and
* Still-high dependence on light trucks, and full-size pickups in
particular, for profitability in North America, although new car
introductions in recent years have fared well;
We expect Ford’s financial results to remain highly sensitive to
future industry sales and product mix, actions by competitors, and other
factors that are beyond its direct control such as higher raw material
costs or fuel prices.
The ratings reflect, among other factors:
* Our expectations that Ford’s profitability in North America will
continue;
* Our view that Ford will generate automotive operating cash flow
in its global automotive operations of at least $2 – $3 billion in the
next few years;
* That Ford’s products will maintain an improved perception in the
retail market; and
* Our view that Ford’s adequate liquidity and substantial cash
balances will persist.
Our economists forecast U.S. light-vehicle sales of about 12.6
million units in 2011, 8.6% higher than 2010 levels. Our forecast for
2011 has been reduced by increasing economic uncertainty and even with
an improvement over 2010, 2011 sales would represent the fourth year of
sales at or below estimated replacement levels. Our forecast for 2012 is
13.5 million, only slightly above 2008 and estimated replacement levels.
Our outlook for the major auto markets in Europe, Ford’s
second-largest market, is less positive than for the U.S. market. We
expect sales in Europe to be modestly lower in 2011 than in 2010–EU
passenger car registrations were down around 1% for the first nine
months of 2011. We believe profit margins in Europe will remain under
pressure primarily because of the excess capacity and varying economic
conditions, resulting in tough competition. Ford reported a small profit
in the second quarter: We assume any losses or cash use in Europe will
not become substantial enough to affect the ratings.
We assume Ford will work to address its unfunded post-retirement
obligations–a massive $17.9 billion at the end of 2010–and we believe
this unfunded amount will rise at the end of 2011 because of a lower
discount rate.
** Market News International Washington Bureau: 202-371-2121 **
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