The Ford Motor Company has been dealt a blow by credit rating agency Moody’s Investors Service, which has cut the carmaker’s credit rating to junk on doubts that a turnaround plan by chief executive Jim Hackett will generate earnings and cash quickly enough.
Moody’s downgraded Ford to the highest junk rating, Ba1, saying the carmaker’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 US 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. Mr 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 slow-selling sedans.
“It’s a pretty precarious situation that they’re in,” said Charlie Chesbrough, senior economist of Cox Automotive. “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 Company’s 5.113% bonds due to mature in 2029, weakened relative to treasuries after Moody’s issued its release. The extra yield, or interest rate, spread the notes pay widened 0.3 percentage point to 3.45 percentage points.
“Ford remains very confident in our plan and progress,” said the carmaker.
“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 car show, yesterday, 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 reorganising its operations in the region.
It’s not the first time that Ford has 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 during the financial crisis.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.
Chairman 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, though. 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.
“We think there’s a high probability that if they were to downgrade Ford to BBB-, it would come along with a stable outlook,” said Joel Levington, an analyst at Bloomberg Intelligence.
“And if that happened, then you would still be an investment-grade issuer for bond index purposes.”
In July, Ford issued an annual profit forecast that disappointed investors as the carmaker struggles to compete in China’s slumping car market.The downgrade comes just three months after Mr Hackett installed a new chief financial officer, Tim Stone.
The former finance executive for Amazon.com and Snap is the first CFO Ford has hired from outside the company since the 1940s.