Ford, GM Debt Ratings Raised to Highest Junk Level by Moody’s

Ford Debt Ratings Raised to Highest Junk Rating by Moodys
Ford Motor Co. 2011 Explorer XLT sport-utility vehicle's (SUV) are parked and awaiting export to Japan at the Georgia Ports Authority Colonel's Island auto import and export terminal in Brunswick, Georgia, U.S. Photographer: Stephen Morton/Bloomberg

Moody’s Investors Service raised the credit ratings of Ford Motor Co. and General Motors Co. to the cusp of investment grade, citing new U.S. labor contracts that preserve the automakers’ cost positions.

Moody’s lifted Ford and GM’s ratings one level each to Ba1, the highest non-investment grade, with a positive outlook on both, according to separate statements yesterday by the New York-based company. The automakers’ four-year agreements with the United Auto Workers allow the companies to sustain “competitive” cost structures in North America, Moody’s said.

“One of the hurdles in getting to an investment-grade rating is the difficulty in gauging just how bad things could get in Europe,” Bruce Clark, a New York-based analyst for Moody’s, said in the company’s statement on Ford. GM’s key challenges include increasing the use of global vehicle architectures and improving the competitiveness of its operations in Europe, Clark said.

Standard & Poor’s raised Ford’s credit rating two levels to BB+, the highest non-investment grade, from BB-, and assigned a stable outlook on Oct. 21. The New York-based company raised GM to the same rating on Sept. 29.

S&P’s stable outlook on Dearborn, Michigan-based Ford and Detroit-based GM imply there is less than a one-third chance that the companies will be upgraded again within a year, Robert Schulz, S&P’s auto analyst, said Oct. 19.

Ford Dividend

Ford and GM fell to so-called junk status six years ago. Ford has said it may restart its dividend, which its says is no longer predicated on returning to investment grade. Ford may begin a 5-cent payout in January, according to an analysis by Bloomberg.

“We expect Ford to announce a quarterly dividend program sometime in the near term, and the action will cut into Ford’s cash flows, slowing the company’s plans to decrease its debt loads,” Jody Lurie, a credit analyst at Janney Montgomery Scott LLC in Philadelphia, wrote in an Oct. 26 research note. “While we still believe Ford is on track to achieving investment grade, a new dividend plan would delay this milestone.”

Ford reiterated its goal of reducing debt to less than $10 billion by 2015 on Oct. 26, when it reported third-quarter net income of $1.65 billion. The company had automotive debt of $12.7 billion on Sept. 30, down from $14 billion on June 30.

GM and Ford have said their new contracts with the UAW will increase their labor costs by 1 percent or less on an annual basis.

Ford’s hourly labor costs, including wages and benefits, will rise to $59 from $58, Marty Mulloy, Ford’s chief labor negotiator, said in an Oct. 20 interview.

Wage increases for GM’s entry-level workers, $5,000 signing bonuses and other benefits add up to $675 million in additional costs through 2013, the company said Sept. 28. GM said it got $460 million in savings to partially offset pay increases.

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