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January 31, 2018

Moody’s warns on Ford outlook but debt rating holds

Moody's Investors Service has changed the rating outlook of Ford Motor Company to negative from stable, but affirmed the company's existing Baa2 senior unsecured debt rating.

Moody's Investors Service has changed the rating outlook of Ford Motor Company to negative from stable, but affirmed the company's existing Baa2 senior unsecured debt rating.

The ratings company said the current rating reflects the competitive position the company holds in the North American and Chinese auto markets, and its sound liquidity position. Nevertheless, it warned that 'Ford is facing a more challenging operating environment characterised by: rising incentives; softening demand in North America; higher commodity costs; and increased spending to expand its portfolio of electric vehicles'. These factors, it said, have contributed to weaker operating performance and an erosion in credit metrics which are now weak for the Baa2 rating level.

Moody's said the negative outlook reflects the challenges Ford will face in implementing its "Fitness Redesign" initiatives, and restoring operating performance that is more solidly supportive of the Baa2 rating.

During the past 18 months, Moody's notes, Ford 'has allowed an erosion in many of the operating disciplines that it established following the 2009 restructuring of the North American auto sector'. These disciplines supported strong performance through 2016, it said. In addition, Ford is contending with the disruptive changes being caused by the auto sector's move toward vehicle electrification, autonomous driving, and ride sharing.

The "Fitness Redesign" is an expansive undertaking intended to: 1) re-establish Ford's competitive cost structure; 2) better allocate capital across various geographic regions and business opportunities; and 3) streamline decision-making within the organization.

Moody's acknowledged that Ford's ability to stabilise its outlook will be determined by the pace at which it can successfully implement the Fitness Redesign  – championed by CEO Jim Hackett. Nevertheless, Moody's expects that Ford's operating performance will remain under pressure into 2019.

However, it also said that during the course of 2018 several factors could contribute to the longer-term success of the program and could also support a stabilisation of the outlook. These factors include: 1) the successful launch of vehicles in Ford's robust 2018 new product pipeline; 2) a strengthening in operating margins during the second half of 2018 on the back of the new product rollout; 3) a material improvement in working capital and other asset management initiatives that will improve cash generation; and, 4) further improvement in product mix and net pricing globally. Progress in these areas will be constructive in restoring metrics that could support the Baa2 rating by 2019.

Moodys' noted that an additional challenge facing Ford, and the entire auto industry, is the need to 'allocate capital judiciously across an expanding range of potential investment opportunities such as: geographic markets, vehicle categories, drive-train technologies, joint ventures/partnerships, and the various business models related to ride-sharing, etc'. This capital reallocation process 'could result in sizable restructuring expenditures should Ford decide to exit major businesses, product categories, or markets'.

Moody's added that if such restructurings occur, 'they could place additional pressure on Ford's already weak near-term financial performance and on its liquidity position'. This added stress would have to be balanced against the timing, magnitude and certainty of the anticipated restructuring benefits.

Moody's warned that the Ford ratings could be downgraded unless Ford's "Fitness" program shows clear signs of progress.

In its Q4 results announcement last week, Ford warned of pressures on its financial performance in 2018.

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