Another Ratings Downshift for Ford

Standard & Poor's cuts the carmaker's credit score again, citing a "seemingly relentless" deterioration in its North American auto biz

From Standard & Poor's RatingsDirect

Standard & Poor's Ratings Services said on Sept. 19 that it lowered its long-term corporate credit ratings on Ford Motor (F), Ford Motor Credit (Ford Credit), and all related units—except FCE Bank—to B from B+, and its short-term ratings on these entities to B-3 from B-2. The ratings on FCE Bank, Ford Credit's European bank, were lowered to B+/B-3 from BB-/B-2, maintaining the one-notch rating differential between FCE and its parent that was established in July.

All ratings are removed with negative implications from CreditWatch, where they were placed on Aug. 18 following Ford's announcement of a dramatic cut in light truck production for the fourth quarter. The outlook is negative.

Ford Motor's consolidated debt outstanding totaled $153 billion on June 30.

"The downgrade reflects the seemingly relentless deterioration in Ford's North American automotive operations, which are now expected to remain unprofitable until at least 2009," says Standard & Poor's credit analyst Robert Schulz.

The array of challenges that have plagued Ford in recent years—market share erosion, adverse product-mix trends, and high dealer inventories and raw material costs—have continued to worsen in 2006 or even accelerate, leading to a higher-than-anticipated use of cash since S&P last lowered Ford's ratings in June. S&P expects that 2007 will also be a challenging year for cash usage. The recent announcements of an expanded cost reduction program in North America, while important, cannot be expected to gain much real traction until 2007, and the cash costs of head-count reduction will mostly occur in 2007.


  Of particular concern has been the dramatic falloff in the full-size pickup truck market in recent months after the segment held up well through the first quarter of this year. Ford's F-series pickups, which represent one-third of Ford-brand sales and a far greater share of profitability, were down 13% through the first eight months of the year, although last summer's volumes were abnormally boosted by the employee discount program.

The decline in sport-utility vehicle (SUV) sales began much earlier, but has hit Ford particularly hard in 2006, with sales of the Expedition and Explorer both down more than 30% this year through August. In the first eight months of 2006, Ford sold nearly a quarter-million fewer pickups and SUVs than a year ago, a 17% drop.

As consumers have shifted to more fuel-efficient vehicles, Ford's ratio of light truck to overall vehicle sales fell to 62% from 67% in the year-earlier period. This mix shift has a greatly magnified impact on Ford's bottom line because of the smaller vehicles' lower margins, and is unlikely to reverse.

The ratings outlook on Ford is negative. S&P's concerns include Ford's increasingly negative cash flow in its North American automotive operations. The ratings could be lowered if further setbacks, whether industry-related or Ford-specific, were to increase the use of cash, delay cash savings from the latest cost-cutting and restructuring efforts, or constrict liquidity.

Also, if Ford Motor eventually chooses to replace its unsecured bank facilities with secured financings, the rating for Ford's senior unsecured debt would likely be lowered as much as two notches below the corporate credit rating. Ford would need to reverse its current financial and operational trends, and sustain such a reversal, before S&P would revise its outlook to stable.

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