Ford’s 1999-Level Debt Flashback Signaling Credit UpgradeCharles Mead
Ford Motor Co. is improving its finances to about the best levels since 1999, giving creditors a lower risk of default than its current credit ratings suggest.
The only U.S. automaker to forgo U.S. aid during the financial crisis has cut debt to 84 percent of capital from a 113 percent peak in March 2009 and below the 94 percent 15-year average. Ford’s one-year Bloomberg Default Risk of 0.1 percent is typically associated with borrowers ranked two levels higher than its Baa3 grade from Moody’s Investors Service and equivalent BBB- rankings by Standard & Poor’s and Fitch Ratings. As recently as 2001, all three rated the company in the A tier.
While Ford’s $147 billion of annual revenue last year is 17 percent below the record sales posted in 2005, the Dearborn, Michigan-based company is promising better results in 2015 as it doubles new-model introductions worldwide this year. Relative yields on Ford notes due 2022 are now below those of similar corporate bonds, after trading above a year ago.
“Their financial profile right now is probably even better than when they were rated very high,” said Hitin Anand, a New York-based analyst at debt-researcher CreditSights Inc. “The market is expecting it to be high triple-B to low single-A.”
Jay Cooney, a spokesman at Ford, didn’t respond to messages seeking comment on the company’s finances.
While Ford shares rose less than the S&P 500 Index last year, the company’s bonds delivered a total return of 3.7 percent. That compares with an average 0.9 percent loss for $1.68 trillion of similarly rated corporate debt tracked by Bloomberg.
The outperformance coincided with a 9.4 percent increase in revenue and a plummeting pension deficit. Ford’s global pensions were underfunded by about $9 billion at year-end, down from $18.7 billion in 2012, and Chief Financial Officer Robert Shanks said on a Jan. 28 conference call to discuss fourth-quarter results with analysts and investors, that he expects to be fully funded “by mid-decade.”
Free cash flow that analysts estimate will more than double to $4.4 billion in 2015 from this year should support Ford’s plans to fulfill pension obligations as well as reduce debt, according to Joel Levington, an analyst at Bloomberg Industries.
“The credit trajectory is favorable, and management’s intent is positive as well for bondholders,” said Levington, who highlighted Ford’s 1999-like profile in a Jan. 30 Bloomberg Industries report. The company’s bonds are “already baking in more improvement,” he said.
Ford has $58.6 billion of bonds and loans outstanding, $42.6 billion of which is at Ford Motor Credit unit, Bloomberg data show.
The company’s $1 billion of 4.25 securities due September 2022 and issued through its finance unit traded yesterday at 101.8 cents on the dollar to yield 4 percent. That means investors are demanding about 1.6 percentage points of extra yield relative to Treasuries on an option-adjusted basis, less than the 1.72 percentage-point spread for similar-maturity corporate debt in the BBB rating tier, Bloomberg data show.
A year ago, the Ford debt paid a spread of 2.1 percentage points while comparable securities yielded an extra 1.9. The spread on the Ford bond narrowed to 1.57 points at 10:02 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“We view Ford as a cheap single A rather than a rich BBB, which is in line with our view that Ford will likely continue to migrate up the ratings spectrum over time,” Anand wrote in a Jan. 28 report. Higher ratings typically reflect improving creditworthiness and confer lower borrowing costs.
Fitch, the third-largest ratings company, preceded the larger Moody’s and S&P in raising Ford’s credit rank to investment-grade in April 2012, ending six years of so-called junk status. Moody’s followed a month later with S&P boosting its rating in September 2013.
“At this point, I don’t think we’re necessarily concerned about negative moves,” Stephen Brown, an analyst at Fitch in Chicago, said in a telephone interview. “If the company continues to perform over time, there’s certainly the possibility of higher ratings,” though the “stable” outlook means any potential increase probably wouldn’t occur within the next few months, he said.
“We want to see very strong liquidity levels, low debt levels and reduced pension obligations,” Brown said. “We’re perhaps holding them to a higher standard now because we’ve seen how bad things can get.”
The automaker was stripped of its investment-grade status in 2005, when gasoline prices rose and sales of sport-utility vehicles collapsed.
Ford lost $30.1 billion from 2006 to 2008 as worldwide vehicle sales plunged below 5 million units in 2009 from 7.4 million in 2000, Bloomberg data show. The measure has since recovered to 6.3 million units in 2013 with Ford generating profit of $7.2 billion.
“We’re squarely in the cycle where you should expect additional upgrades, because they have been able to repair their profitability and their balance sheet,” Scott Colyer, chief executive officer of Monument, Colorado-based Advisors Asset Management, which oversees about $12 billion, said in a telephone interview. “Their debt has outperformed tremendously.”