Moody's cuts Ford credit rating to 'junk' status
Moody's Investors Service downgraded Ford Motor Co.'s credit rating to "junk" status Monday, a move that could make it more expensive for the automaker to borrow as it undertakes a sweeping global restructuring amid slowing global sales and a rapidly changing industry.
The ratings agency believes the automaker's years-long restructuring under CEO Jim Hackett will be too costly to generate much return for shareholders. Monday's downgrade to Ba1 — the highest non-investment grade rating — comes as Ford and Hackett have said repeatedly over the last year that 2019 would deliver the results promised, including improved profit margins around the world.
Last August, Moody's had downgraded Ford to its lowest investment grade, Baa3. In May, Moody's upgraded Fiat Chrysler Automobiles NV to the same Ba1 status, an improvement for the automaker driven by strong SUV and truck sales in North America. And the agency last November labeled General Motors Co.'s U.S. restructuring "credit positive."
The Ford "downgrade is an unfortunate inevitability of where we are in the cycle for the auto industry," said David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC. "They have this massive restructuring underway and all the auto companies are trying to figure out how to deal with autos 2.0."
In a note, Moody's Senior Vice President Bruce Clark wrote that Ford's financial performance has lagged during "a period in which global automotive conditions have been fairly healthy. Ford now faces the challenge of addressing these operational problems as demand in major markets is softening."
He added: "The company does have a sound balance sheet and liquidity position from which to operate."
Ford and Hackett are in the early stages of a $25 billion global cost-cutting plan expected to cost the company some $11 billion over the next several years. The automaker is already incurring some of those charges. The automaker's second-quarter earnings slid 86% on restructuring charges. Ford also adjusted its full-year fiscal outlook, which disappointed investors.
Ford shares fell 3.6% in aftermarket trading Monday on news of the downgrade, erasing Monday's gains. The stock had closed up 2.14% before the downgrade was announced.
The Moody's downgrade essentially would make it more expensive for Ford to borrow money. Those buying Ford stock would incur more risk, and there would be fewer available buyers for junk-status bonds.
"Ford remains very confident in our plan and progress," Ford spokesman T.R. Reid said in a statement. "Our underlying business is strong, our balance sheet is solid and we have plenty of liquidity to invest in our compelling strategy for the future."
Clark wrote that the problems Ford is addressing around the world will take years to bear fruit. The automaker has operational inefficiencies in key markets like North America and China, Moody's said. Earnings have have fallen in China, and the automaker has an old lineup there.
Two other major credit rating agencies — Fitch Ratings and S&P Global Ratings — give a BBB grade to Ford, which is two steps above junk status. Both give a negative outlook to the company.
Ford lost less money in the second quarter than it had a year ago, but officials have said the automaker is taking hits as it readies its Chinese lineup for new SUVs and electric vehicles. Its sales in China fell 27% through the first six months of 2019 after Ford spent most of 2018 restructuring its leadership in China and adapting its plan for the future. The automaker plans to roll out 30 new Ford and Lincoln vehicles there in three years, among other things.
"We are making significant progress on a comprehensive global redesign — reinvigorating our product lineup and aggressively restructuring our businesses around the world," Reid said. "As Moody’s notes, we are already addressing two of its primary concerns: operating inefficiency and our China business. The agency also calls out our 'sound' balance sheet and liquidity position, and expects our global redesign and new products to contribute to improvement in earnings, margins and cash generation."
Meantime, Clark said Ford's global restructuring could last until at least 2023. Further, Ford is trying to improve global operations while also spending billions on electrification and autonomous driving. The ratings agency notes Ford has $23.2 billion of cash, which exceeds its debt. The automaker could be upgraded if Ford moves its North American automotive profit margin above 9% for a sustained period (it was 7.1% in the second quarter), and full automotive margins climb about 7% (it was 3.8% in the second quarter, among other things.
"An upgrade of Ford during the near term is unlikely," Clark wrote.
Kudla said it could take a year or more for the ratings change. The last time Moody's downgraded Ford was in August 2018. For a while, the junk status will negatively impact Ford's ability to borrow, its lending arm and other financial aspects of the business.
"They're undertaking a lot right now in a softening auto market," Kudla said. "These companies are still like turning around a battleship."