Print

Mail

wiki links

Moody's may lower Ford's rating

Ford Motor Co announces their revitalization plan at the Ford's Conference and Event Center in Dearborn, Michigan Friday. Seated from left: Chief Financial Officer, Martin Inglis, Chairman and CEO, Bill Ford Jr., President and Chief Operating Officer Nick Scheele and Jim Padilla Group Vice President North America. PHOTO: AFP

Ford Motor Co's credit ratings may be cut by Moody's Investors Service if the second-largest automaker's plan to cut costs through firing workers and closing plants doesn't revive earnings.

Moody's placed Ford's "A3" rating on review, with the "A2" and "P1" ratings of its finance arm, Ford Motor Credit.

Standard & Poor's reduced its outlook to "negative" from "stable" while affirming Ford's "BBB+" rating.

"The question is whether Ford is going to have a viable business model and if they will be able to generate positive cash flow and earnings," said Moody's analyst Bruce Clark in an interview. "And whether that's going to be sufficient to hold its credit rating."

The changes affect about US$140 billion of debt from one of the world's biggest sellers of corporate bonds. Ford bonds had their biggest one-day decline since Dec. 17.

Ford said it plans to eliminate 35,000 jobs, close five plants and stop making four vehicle models to rekindle earnings after posting its first annual loss since 1992. This year, the automaker faces slowing sales and sliding market share in trucks and sports utility vehicles.

The carmaker's shares rose US$0.21, or 1.4 percent, to US$15.50.

The automaker's bonds fell on the news of the Moody's review.

Ford's 6 7/8-coupon notes due in 2006 fell to 102.2 cents on the dollar from US$1.03, traders said, pushing the yield to 6.84 percent from 6.69 percent. That would be the biggest one-day drop since Dec. 17, according to Bloomberg data.

Ford's credit default swaps, insurance for investors against a bond default, rose US$28,000 to US$215,000 per US$10 million of protection after the Moody's report, according to John McEvoy, a co-founder of Creditex Inc, an online derivative exchange part- owned by JP Morgan Chase & Co and Deutsche Bank AG.

The lower the credit rating, the more expensive it becomes for a company to borrow. If Ford loses its "P1" short-term rating, it becomes harder to sell commercial paper for day-to-day funding. Ford's already been forced to reduce its commercial paper borrowings on concern its ratings will drop.

It also increases the perceived risks that the company may default. Ford's ratings were downgraded by Moody's as recently as October, retaining a negative outlook. The review makes another downgrade more likely.

"We'd rather be underweight Ford right now, because the risks versus the rewards are too asymmetric," said Robert Kinsey, who recently sold some of his Ford holdings in the US$3 billion of fixed income assets he helps manage at ING Pilgrim. "We don't think all of the bad news is out."

Moody's has assigned Ford relatively higher credit ratings than S&P. At "A3," the Moody's rating is four levels above junk status while S&P's ratings is three levels above. S&P analyst Scott Sprinzen also said he is waiting for proof that Ford's strategy will work under new Chief Executive Officer William Clay Ford Jr. who replaced Jacques Nasser in October.

"We're saying that the rating is on a pretty short tether and we will be looking at it closely in the course of the year," Sprinzen said in an interview.

Lower ratings have already forced Ford to change the way it finances its business.

Ford Motor Credit reduced its commercial paper outstanding to an average US$11.35 billion last quarter, down from more than about US$20 billion a year ago, according to Bloomberg data. The company prepared for a credit rating cut by increasing the size of its asset-backed commercial paper program to US$12.5 billion from about US$1 billion in June.

The interest that companies pay on asset-backed commercial paper is higher than what top-rated companies pay on unsecured comparable debt, even with start-up expenses of US$20,000 to US$100,000. Still, the cost is lower than other forms of short-term financing, such as bank loans.

The finance arm's commercial paper had already been trading as a tier-two borrower, because it had second-tier ratings from both S&P and Fitch Inc, so its borrowing costs will likely remain the same, traders said. Some investors may take the company off their approved lists if it loses the top rating from Moody's, which will force the company to sell more asset-backed commercial paper.

The automaker earlier this week sold US$5.1 billion of bonds backed with auto loans, most of which were rated "AAA," because it was cheaper than selling unsecured bonds.

It also plans to sell $3 billion in convertible preferred securities to help raise cash.

The "Baa1" long-term ratings of Ford's Hertz Corp. rental car unit are also now on review, Moody's said. S&P also has a negative outlook on Hertz's "BBB" rating.
This story has been viewed 2007 times.