Downgrade may further push Ford's reliance on ABS
A junk debt rating downgrade assigned to Ford Motor Co. and its subsidiary finance company this week by Moody’s Investor’s Service could increase the automaker’s dependence on financing through the securitization market.
In a report published Tuesday by Deutsche Bank, analysts said the unsecured credit rating downgrade to Ba1 from Ford’s prior grade of Baa3 could be a catalyst for increased levels of issuance from Ford Motor Co.’s various platforms that pool auto loans, leases and dealer-floorplan financing for asset-backed securities investors.
Ford Motor Credit is already one of the leading sponsors of auto-finance securitizations in the U.S. market, having priced $7.2 billion in bonds this year alone, according to data from Finsight. As of June 30, its outstanding volume of term ABS notes was $57 billion, compared to its bank debt of $74 billion.
“We think this rating action could make funding in the term ABS market more attractive for the company, and could see increased ABS issuance as a result,” wrote Deutsche research analysts Kayvan Darouian and My Bui.
With a junk Moody’s debt rating, Ford could face higher costs in bank financing, or any re-entry into the high-yield market where coupon rates are typically higher for investors. (Ford has issued the vast majority of its notes with triple-A ratings). Ford still carries the higher-grade BBB debt and corporate ratings from S&P Global Ratings and Fitch Ratings.
Moody’s took no actions on any outstanding Ford ABS transactions, including the senior-note Aaa ratings Moody’s has previously assigned to those deals. But subsequent issues as a speculative-grade borrower could mean FMC trusts will pay higher rates and/or lending more credit support to pools for ABS investors than previously priced with FMC as an investment-grade entity, since investors are taking on higher risk.
The “company’s cost of debt funding could increase, resulting in narrower finance margins, but this would occur over time,” Moody’s report stated, adding the downgrade will limit Ford Motor Credit’s financial flexibility due to its dependence on securitizations.
But Moody’s expects Ford will continue managing a stable portfolio of $155 billion in loan, lease and dealer floorplan receivables during the global redesign and product renewal initiatives. “Additionally, we expect that Ford Credit’s managed debt to equity leverage will be managed to within its historical range of 8x to 9x” debt-to-earnings, Moody’s stated.