“We think this will be favorably received” by credit rating companies, Chief Financial Officer Lewis Booth said last week after the UAW contract was approved.
Standard & Poor’s Ratings Services has raised its corporate credit rating on Ford Motor and Ford Motor Credit to ‘BB+’ from ‘BB-‘. This is just one notch below investment grade.
Ford bonds have been appropriately rated as “junk” since 2005, when it was deeply in debt and struggling in Europe and North America, while Ford after decades of investing in large trucks and SUVs remained a mere footnote in booming Asian markets – the only significant growth markets in the automotive world.
Ford then borrowed $23 billion to fund restructurings in Europe and North America in 2006, further casting doubt on its financial viability.
In spite of two years of profitability, Ford still has $14 billion in debt as of June 30, according to an SEC filing. S&P warned that Ford’s business risk profile is “fair,” and its financial risk profile remains “significant.”
Higher credit ratings allows Ford to pay lower interest rates to borrow and refinance debt, which is needed to pay down existing debt and finance needed capital expenditures of roughly $7 billion annually. The S&P upgrade is largely based on the approval of a four-year Ford UAW contract that will actually decrease labor costs over its tem. (See Ford UAW Workers Ratify 4-Year No Cost Increase Contract)
“The upgrade reflects our view that, among other things, Ford’s prospects for generating free cash flow and profits in its automotive manufacturing business remain intact, because of its cost base in North America,” said Standard & Poor’s credit analyst Robert Schulz.
“We believe the company’s automotive operations in North America will remain profitable with industry light-vehicle sales at or even somewhat below current levels (i.e., more than 11.5 million units). We also believe Ford has good prospects for generating at least $2 billion in automotive operating cash flow in 2012, even if the key U.S. auto market does not recover significantly. But we also note that cash flow will be sensitive to volume and cost headwinds–including commodity prices and other cost increases–as well as future production volatility,” said Schulz.
(See also Ford Common Stock Dividend Coming Next Year? )
