Ford's debt rating downgraded by Moody's: a strong sign (2019/09/22)

In the midst of the Frankfurt Motor Show, Moody's announced that it was downgrading its credit rating on Ford Motor Company's debt from Baa3 to Ba1.

 

It thus removed bonds issued by Ford from the "investment grade" category and placed them in the "speculative" a/k/a "junk bond" category.
As asset management specialists explain, the risk is that prices will fall as some investors are not allowed to hold such securities, displaced to "non-investment grade" category: they are then required to get rid of them.
Fortunately for Ford, Moody's decision was not followed by the other two major rating agencies, S&P and Fitch, and this allows the holding of Ford's debt securities in "investment grade" form to be maintained, but the signal sent was sufficient to cause a sharp increase in the yield spread on the manufacturer's bonds.
As explained by the Wall Street Journal, this results in higher borrowing costs for Ford, which can put a strain on the group's profitability by affecting in particular Ford Motor Credit, the captive finance company, which is naturally the most active on the debt market.
With S&P and Fitch, while maintaining a BBB rating, placing Ford's debt on negative watch, this week's announcement could be the beginning of a problematic financial drama for Ford.

 

To justify its decision, Moody's states that "Ford is facing operational problems at a time when demand is softening in the main automotive markets and the industry is facing unprecedented change related to vehicle electrification, autonomous driving, carpooling, car sharing and regulations in terms of (CO2) emissions that are particularly heavy".
It adds that the restructuring plan undertaken this year will only be able to produce the potential beneficial results expected in three or four years. In the meantime, the restructuring will first correspond to costs that will reduce margins and could even, according to Moody's, put the manufacturer in a negative cash position.

 

Actually, the second quarter results announced in July show a decline in net income of 86% to $148 million despite earnings before interest and taxes (EBIT) that were only 2% lower than a year earlier.
Profitability is mainly driven by the North American businesses, which generated a margin of 7.1% (down only 0.3 points). They make it possible to finance the very heavy restructuring plans undertaken in Europe and South America, which cost $1.2 billion in the second quarter alone. Ford management has announced a slight improvement in Europe, but it will be far from being able to finance the costs associated with the announced shut down of 6 industrial sites. However, he confirmed that all other regions were in the red with losses of $45 million for Africa and the Middle East, $155 million for China and $205 million for South America in the quarter. All these losses are not offset by the profitable financial captive and, despite North America's profitability, we can only be concerned with Moody's' ability to jointly finance its restructuring - or even its recovery - in other regions of the world and its ambitions in electricity, autonomy and new mobility.

 

Typically, in the same second quarter, Ford's mobility business absorbed $264 million, 46% more than a year earlier. The company's investment in the software company Pivotal cost $181 million and the development costs for the autonomous vehicle amounted to $79 million. Not to mention the serious uncertainties that weigh on the long-term success of the various recovery plans defined for each region of the world under the banner of "Reset and Redesign", the year 2019 alone justifies that the financial community can be concerned about the sustainability of a debt that is already worth $157.2billion . 
Indeed, in Europe, Ford will have to face, like everyone else, the market downturn and the consequences of a Brexit that affects Ford more than other automakers, since the United Kingdom is the only market in which the United States is the leader and represents a quarter of its sales. In China, the drop in sales has had an impact on Ford to the same extent as PSA, capacity utilisation rates are around 24% and tensions between the two partners, JMC and Changan, are extreme. In the United States, the strike at GM announces very tough discussions with the UAW.

 

"Reset and Redesign" is trying to reassure by aiming, following the example of what was decided with the abandonment of sedans in the United States, at tightening the ranges on their most profitable components and, in particular, on SUVs and, for Europe in particular, on LCVs. The challenge is that by giving up the race for volumes or market shares, it is possible to guarantee a profitability that would make investments possible and debt sustainable.
To some extent, the agreement with VW to have the right to use its platform dedicated to battery-powered EVs provides another alternative: the renunciation of being present on all fronts. One can only wonder whether what is already being developed in the technological field will not be geographically imposed on Ford. Much has been said about Ford's desertion from Europe. With its 1.4% market share in China (compared to 3.8% in 2016), there are some reasons to believe that, if there were to be a renunciation for Ford, making a cross on the world's number one market would be the right option.

 

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 Translated with www.DeepL.com/Translator, corrections by Géry Deffontaines