Fitch Downgrades Ford & Ford Credit to 'BBB-'; Outlook Remains Negative

CHICAGO--July 20, 2005--Fitch Ratings has downgraded the senior unsecured debt of Ford, Ford Credit and various affiliates to 'BBB-' from 'BBB'. Ratings on the Capital Trust II securities have been downgraded to 'BB' from 'BB+'. Fitch has also affirmed the 'F2' commercial paper ratings. Additionally, Fitch has lowered the ratings of Hertz have to 'BBB-' from 'BBB' and remain on Rating Watch Evolving.

The downgrade of Ford reflects the deteriorating profitability of Ford's North American operations, most recently affected by new pricing initiatives, higher commodity costs and supplier issues, while the Hertz downgrade solely represents its ownership by Ford. Along with the sharp decline in large and mid-size SUVs during 2005 and cash outflows related to restructuring activities, Fitch expects that cash flow will remain negative through 2005 and potentially into 2006. The Rating Outlook remains Negative given significant revenue pressures from industry product and price competition, and the competitive disadvantage represented by its cost structure. A full list of impacted ratings is attached below.

Fitch remains of the view that Ford and Ford Credit are likely to remain investment grade through 2005, as recent product performance and very healthy liquidity provide Ford with the time and resources to address structural cost issues (including legacy costs). Stabilization of the rating will be reliant on progress Ford is able to make in its cost structure over the near term, given the competitive environment and the expected difficulty in meaningfully improving revenues. Stabilization of cash flows from the cost side could arise from a combination of sources including: commodity price relief, structural cost reductions from employee attrition and buyout programs, restructuring actions at Ford facilities and the acquired Visteon assets, a strengthening dollar (benefiting PAG imports into the U.S.), and potential concessions from the UAW regarding legacy costs. Ford has been vocal about its over-capacity situation, and progress in this area will take time and financial resources. Ford's financial position provides substantial capacity and liquidity with which to address its cost position.

Fitch's previous downgrade of Ford and Ford Credit (May 1, 20059, 2005) incorporated the expectation of modestly negative to break-even cash flows in the automotive segment given the sharp decline in higher-margin mid-size and large SUVs, expectations of heightened price competition for Ford's key F-series products, commodity pressures and heightened supplier issues. The recent establishment and extension of incentive programs in the industry have created new price points, and re-emphasizes the need for further structural cost reductions in order to stabilize margins and cash flows. Volume gains could reduce extended inventory positions, but the sustainability of industry sales volumes remain in question. With increased incentives, domestic OEMs have become increasingly vulnerable to volume declines that could surface in the event of a decline in economic conditions or as the result of sales pull-forward.

Fitch expects that Ford will show negative automotive cash flow in 2005 despite favorable GDP, steady employment growth and very healthy industry sales volumes. Ford also remains exposed to pricing initiatives by transplants that have substantially larger capacity to absorb margin contraction. Despite the recent decline in steel prices, meaningful relief is not expected to be realized until 2007, although some relief should occur from declining pass-throughs from suppliers who are more reliant on spot prices. Higher warranty outlays have also impacted cash flows, and increasing health care costs continue to be a key competitive cost disadvantage.

Despite successful recent product introductions, an increasingly flexible manufacturing base and several new models scheduled for the remainder of 2005, Ford will remain challenged to improve top-line performance. June sales trends showed continuing positive trends in Ford's car sales, but also showed a meaningful increase in lower-margin fleet sales. Ford ended the month with extended inventories across a number of key high-margin product lines, requiring the establishment of new price incentives, and further raising the potential for production cutbacks.

Supplier issues remain at the forefront, exemplified by Ford's agreement to bring Visteon's assets and liabilities back on-balance sheet (as well as recent support provided by multiple OEMs to Collins and Aikman). This situation represents a reversal of the historic trend wherein the OEMs were able to extract regular price concessions from their supplier base. In an environment that requires OEMs to consistently reduce their cost structure, OEMs will be challenged to extract savings from this source. Increasing levels of financial support are being provided to suppliers to ensure supply chain integrity and required investment related to new product introductions. Although Visteon represents the recognition of Ford's liabilities related to Visteon's assets, Ford's financial resources provide it with the opportunity to accelerate the restructuring of a key, uncompetitive component of Ford's supply chain.

European results have also declined meaningfully in 2005 due to competitive pressures, but other geographic regions have shown strength. Ford's PAG unit rebounded to profitability in the second quarter, a substantial rebound from prior year results. The stronger-than-expected rebound at PAG has reduced what has previously been considered a key risk factor.

Ford's balance sheet remains healthy, with substantial liquidity. Cash and s/t VEBA at June 30, 2005 was $21.8 billion down $1.8 billion from year-end 2004. This relates to $18.1 billion in total automotive debt. The reduction in cash includes voluntary pension/OPEB contributions of $2.5 billion in the first half. Second half cash outflows are expected to accelerate due to outlays related to restructuring of the current Visteon assets, modest operating losses and working capital outflows associated with decreased supplier payables and outflows related to dealer incentive programs. Available liquidity could be strongly supplemented in the near term by the anticipated sale of Hertz.

Ford Credit remains a solid contributor to consolidated operating results and supports the rating. Dividends to Ford Motor are expected to offset a portion of the negative cash flows from auto operations resulting in little balance sheet deterioration. Liquidity is expected to be strongly supplemented by proceeds from the expected sale of Hertz.

Fitch has lowered the following ratings with a Negative Rating Outlook:

Ford Motor Co.