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Ford-UAW Deal Clears Path to Credit Upgrades Within Junk Status

Updated on
UAW Members Vote 63% to Approve 4-Year Ford Pact on New Jobs
Bob King, United Auto Workers (UAW) vice president, speaks during a Ford Motor Co. news conference in Wayne, Michigan. Photographer: Jeff Kowalsky/Bloomberg

Ford Motor Co.’s U.S. hourly workers ratified a new four-year contract that probably will lead to credit-rating upgrades. A return to investment-grade status may still be a 2012 event.

Ford workers voted 63 percent in favor of the agreement in balloting over the last two weeks, the United Auto Workers said yesterday in a statement. Standard & Poor’s and Moody’s Investors Service have said they are reviewing their credit ratings on the Dearborn, Michigan-based automaker, which fell to so-called junk status six years ago.

S&P may raise Ford two levels to BB+, the highest non-investment-grade level, the New York-based ratings company said in a Sept. 29 statement. It’s likely to assign a “stable” outlook on Ford, which implies there is less than a one-third chance that the company will be upgraded again within a year, Robert Schulz, S&P’s auto analyst, said yesterday.

“The contract may have some pluses and minuses on the cost side, but we think it generally is consistent with their ongoing ability to stay profitable in North America,” Schulz said in an interview in Birmingham, Michigan. “We haven’t really talked at all about investment grade.”

Moody’s Investors Service said Oct. 5 it may raise Ford’s credit rating from Ba2, two steps below investment grade, pending the ratification of its agreement. Moody’s said it would complete its reviews of Ford and GM simultaneously, and hasn’t specified what the companies’ new ratings may be.

‘On the Table’

“The possibility of an investment-grade rating is certainly on the table,” Bruce Clark, the New York-based analyst for Moody’s, said yesterday in a phone interview. “We’re going to give that some consideration, but what’s going to be the major hurdle is all of the uncertainty you’ve got in Europe and to some degree the U.S.”

An investment-grade rating would substantially reduce Ford’s borrowing costs, said Mirko Mikelic, a senior money manager at Fifth Third Asset Management, who helps oversee $13 billion of fixed-income assets in Grand Rapids, Michigan.

“Investment grade will be a huge boon for their bonds because it will make them eligible for investment-grade index” funds, said Mikelic, who doesn’t own Ford debt. “People will just pile back into the name when they go investment grade.”

Ford’s 7.45 percent bonds due July 2031 rose 1.625 cents to 116.5 cents on the dollar at 5:30 p.m. yesterday in New York, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Ford Dividend

The deal increases the likelihood Ford will begin paying a dividend for the first time in five years, Rod Lache, an analyst with Deutsche Bank, wrote in an Oct. 17 note.

“This clears one of the final hurdles to the announcement of a meaningful dividend at Ford in the relatively near future,” wrote Lache, who is based in New York.

Bloomberg analysts forecast a 5 cent dividend will be paid in January. Ford shares fell 1.9 percent yesterday to $11.56. They have dropped 31 percent this year after soaring 68 percent in 2010.

Votes of approval at two large factories in Kentucky and one in Ohio on Oct. 18 completed voting that began after the Detroit-based UAW and Ford reached a tentative agreement Oct. 4. The accord adds 12,000 jobs and gives each worker as much as $10,000 in payments this year, according to the union.

“As the nation’s economy remains stalled and uncertain and its employment rate stagnates, we were able to win an agreement with Ford that will bring auto-manufacturing jobs back to the United States from China, Mexico and Japan,” UAW President Bob King said in a statement. “The American auto industry is on its way back.”

Vote Reversal

The final tally is a reversal of early opposition to the deal, rejected by at least five factories last week. Ford is offering $6.2 billion in factory upgrades in addition to the bonus and profit-sharing payments and new jobs. It won’t give raises to senior workers or restore cost-of-living pay increases union members gave up to help Ford survive.

Ford has scheduled a call with analysts and reporters to discuss the contract today at 8:30 a.m. New York time.

“This agreement is proof that by working together with our UAW partners and local communities, we can significantly create new jobs, invest in our plants and people, and make a very positive impact on the U.S. economy,” Mark Fields, Ford’s president of the Americas, said yesterday in a statement.

UAW Local 862 in Louisville, Kentucky, said Oct. 18 that its members at two plants voted 53 percent in favor of the agreement. The Louisville plants employ 5,397 workers who make pickups and sport-utility vehicles. UAW Local 2000 said its members voted 74 percent in favor. The UAW represents 40,600 Ford employees.

Worker Concessions

“A few people are saying we gave up monetary concessions and other things that they’d like to see come back, and rightfully so,” said Jerome Williams, president of UAW Local 2000, which represents workers who voted 999 to 346 in favor at Ford’s Ohio van plant. “But the economic situation isn’t the best right now.”

Four years ago, Ford workers voted 79 percent in favor of a contract that included concessions such as a wage freeze for senior workers and reduced pay for new hires. The 4-to-1 margin of victory was the largest among the three U.S. automakers.

This year, the UAW negotiated U.S. auto contracts for 113,000 workers for the first time since General Motors Co. and Chrysler Group LLC went bankrupt in 2009. GM workers endorsed a new deal last month and workers at Fiat SpA-controlled Chrysler begin voting this week. Only workers at Ford, which avoided Chapter 11, could strike in these talks because GM and Chrysler employees agreed not to walk out as part of their U.S.-backed bankruptcies.

Factory Investments

In Ford’s contract, the automaker promised investments totaling $1.26 billion at the two Kentucky assembly plants. Ford’s Kentucky truck plant will continue building the Super Duty pickup and the Expedition and Lincoln Navigator SUVs. Ford is adding a third shift of workers at the nearby Louisville assembly plant to build a new version of its Escape small SUV.

Ford, the second-largest U.S. automaker, earned $4.95 billion in the first half of the year, as fuel-efficient models like the Fiesta subcompact attracted buyers. Ford’s U.S. light-vehicle sales are up 11 percent this year through September, ahead of the industrywide gain of 10 percent.

Ford earned $9.28 billion in the past two calendar years after $30.1 billion in losses from 2006 through 2008. The automaker borrowed $23.4 billion in late 2006, putting up all major assets including its blue oval logo as collateral. That helped Ford avoid the bankruptcies and bailouts that befell the predecessors of GM and Auburn Hills, Michigan-based Chrysler.

Averts Strike

A strike at Ford would have cost the automaker $273 million a day in lost revenue and $71 million in daily variable profit, according to Brian Johnson, an analyst at Barclays Capital. The UAW has not had a nationwide walkout at Ford since 1976.

“Ford still has the highest per-hour cost, as Chrysler started lower and GM likely benefits from greater skilled trades attrition,” Johnson wrote in an Oct. 17 note, in which he estimated the deal will add $70 million annually to Ford’s labor costs.

Workers, while not entirely satisfied with the agreement, realized it was better to get Ford back to full health and seek to recover additional concessions in the future, said Williams, the labor leader from Ohio.

“We’d like to keep Ford competitive and making money,” he said. “Because the better Ford does, the better we’ll all do.”

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