DCR Upgrades Ford Motor Co. and Ford Motor Credit Ratings
24 September 1998
DCR Upgrades Ford Motor Co. and Ford Motor Credit Ratings
CHICAGO, Sept. 24 -- Duff & Phelps Credit Rating Co. (DCR)
has raised the debt ratings of Ford Motor Company (Ford) and its automotive
financing subsidiary, Ford Motor Credit Company (Ford Credit). The commercial
paper ratings for Ford Credit and its European subsidiary, FCE Bank plc, have
been raised to 'D-1+' (D-One-Plus) from 'D-1' (D-One). The senior debt
ratings for Ford and Ford Credit have been raised to 'A+' (Single-A-Plus) from
'A' (Single-A), and the ratings for Ford's preferred stock, the Trust
Originated Preferred Securities issued by Ford Motor Company Capital Trust I
and Ford Credit's subordinated notes have been raised to 'A' (Single-A) from
'A-' (Single - A-Minus).
Ford and Ford Credit had a total of approximately $115 billion of debt
outstanding on June 30, 1998, including $41 billion of commercial paper.
This upgrade is due mainly to improved operating performance in Ford's
automotive operations, particularly in North America. Ford's product
initiatives and cost-saving efforts have pushed its North American operating
profit upward to current run rate estimates of roughly $1,600 per vehicle and
11 percent return on assets -- levels which DCR believes challenge Chrysler as
the most profitable major automaker in North America. In Europe, cost savings
and product changes, including further rejuvenation of the Jaguar brand and
operations, have increased estimated operating profit to more than $350 per
vehicle from a $200 loss a year ago.
Even with the March spin-off of Ford's remaining 80.7 percent ownership
of The Associates, which had a market value of $18 billion when the spin-off
was announced last October, Ford's financial condition and flexibility are
very strong. The ratings anticipate that Ford may utilize part of its current
$22 billion cash balance for acquisitions or shareholder distributions, but
will nonetheless maintain a relatively large cash balance as cyclical
protection. Ford has demonstrated its sensitivity to drastic changes in its
manufacturing debt levels by recently withdrawing from the second round of
auctioning for the bankrupt Korean automaker Kia after creditors agreed to
write-off less than half of Kia's nearly $9 billion in debt (although DCR
acknowledges that Ford is still a logical leading candidate to take control of
all or part of Kia).
The upgrade recognizes the potential for the current economic turmoil in
Asia and Latin America to cause downturns in demand and increase competitive
pressures in Ford's other markets. However, DCR considers Ford's ability to
weather a global recession to be among the best of all automakers; they may
even benefit as weaker competitors struggle.
Besides the large cash cushion that ensures continued new product
investment spending, the streamlining efforts of the Ford 2000 program are
likely to continue to deliver cost savings, as well as better enable Ford to
respond timely to market changes (such as a shift in consumer preference away
from the larger pick-up trucks and sport-utility vehicles that are a Ford
strength). Ford has consistently rebalanced its product portfolio to
eliminate models with shrinking volumes and unacceptable margins and to
introduce new models--such as the Expedition and Lincoln Navigator large
sport-utilities, the Ka small European car, the F-Series Super Duty trucks and
the forthcoming smaller wheel-base luxury cars for Lincoln and Jaguar -- that
broaden brands and expand segments.
Ford Credit's performance has also improved during 1998. Ford Credit has
increased its global penetration of Ford sales financing, and lower default
levels have enabled asset quality improvement this year despite greater loss
severity driven by softness in the domestic wholesale market for used
vehicles. Notably, used car pricing has strengthened in recent months.
The rating upgrade also recognizes the highly liquid nature of Ford
Credit's receivable portfolio, which has been enhanced by the global
acceptance of securitization as a source of long-term funding. While Ford
Credit securitizes only a modest portion of its receivable portfolio, the
depth of the securitization market combined with the low (less than two-year)
average life and high quality of the portfolio present an efficient source of
liquidity for Ford Credit should the need arise. Interest rate and foreign
currency risk management capabilities, plus limited exposure to emerging
markets, should insulate Ford Credit from the current difficulties in global
financial markets.