Ford’s Motor Co.’s return to investment grade status is a milestone for the auto industry, even if it has emerged from the credit crisis and recession in much better shape than its peers.
On April 24, Fitch Ratings lifted its issuer default rating for the company and its Ford Motor Credit subsidiary to 'BBB-', the lowest investment grade designation, from 'BB+', citing the company’s “significantly improved financial performance, balance sheet repair, and product portfolio improvement” over the past several years.
Ford was the only one of the big three U.S. auto makers not to be bailed out by the U.S. government in 2009, but it carries more debt than Chrysler Group or General Motors. The Dearborn, Mich.-based company borrowed $23.5 billion in 2006, putting up virtually all of its assets, including its blue Ford logo, as collateral. The cash helped carry it through the lean times.
Once a second rating agency moves Ford back to investment grade, the assets it used as collateral for the 2006 loans will be released back to the company.
Moody’s Investors Service rates Ford and Ford Motor 'Ba1' with a positive outlook; Standard & Poor’s has them both at 'BB+' with a stable outlook.
In a note released Thursday, S&P analysts said that Ford’s, a regular ABS issuer, prime auto-loan $2 billion Ford Upgrade Exchange-Linked (FUEL) ABS program has a contingent mandatory exchange feature for Ford Credit’s senior unsecured debt. This would based on the upgrade to investment grade by any two of S&P, Moody’s, and Fitch.
The analysts said that after Fitch’s recent upgrade of Ford to low investment grade, an upgrade by either S&P or Moody’s will cause the exchange.
“Ford is a great success story,” Margaret Patel, a senior portfolio manager with Wells Capital Management, said in an email. She noted that the money Ford raised preemptively in 2006 gave it “the flexibility to ride out the dark days of 2008 and 2009, so they are well positioned for the multi-year upswing in U. S. auto sales over the next several years.”
Ron D’Vari, chief executive of New Oak Capital, said Ford “has been a good benchmark for both managing finances well and staying very much in their market.
D'Vari pointed out that Ford Motor Credit did not venture into home financing in the way that General Motors’ finance affiliate, Ally Financial, did. Auto financing, D’Vari noted, proved less risky because vehicles tend to depreciate and so don’t lend themselves to speculative investment, as real estate does. Autos are also easier to repossess and resell.
Fitch’s upgrade affects a total of $46.6 billion in debt, including $6.3 billion in unsecured senior notes and an undrawn, $9.3 billion revolver held by Ford Motor and $31 billion of unsecured debt at Ford Motor Credit.
The bonds rallied on the news. As Leveraged Finance News went to press, Ford’s 7.45% senior notes due 2013 were trading at 126.75, up from 122.5 on April 23, according to KDP Investment Advisors; Ford Motor Credit’s 8.125% senior notes due 2020 were also at 126.75, up from 123 on April 22, and its 5.75% senior notes due 2021 were at 112.25, up from 109 on April 23.
The bonds are expected to maintain their value. “While they are not as cheap since the upgrade, [Ford bonds] represent good investment value, since the upgrade shows continued credit quality improvement, at a time when fundamentals of the auto industry look to be getting better, with rising car sales through this year and into next year,” said Patel, who does not have any of the securities in her portfolio. “And an improving credit is defensive in a sense, in these volatile times, since the likelihood of nasty negative surprises is relatively low.”
Ford has focused on improving profitability and liquidity and reducing its debt and pension obligations over the past several years. In 2011, it paid down the remaining $838 million of its secured revolver and increased its cash and redeemable holdings by $2.4 billion to total $23 billion for the year, setting its liquidity to exceed its debt by more than $18 billion.
The automotive company had a pre-tax operating profit of $8.8 billion in 2011, an increase of $463 million from the previous year. It was scheduled to release its first quarter 2012 earnings on April 27, afterLeveraged Finance News went to press.
Ford Motor Credit has been on a refinancing spree, tapping the junk bond primary markets three times so far this year. It most recently issued just over $1 billion in 4.875% senior notes due 2015 on March 14. It went to the junk bond well twice in January for a total of $2 billion. It was the first company to issue bonds in 2012 when it sold $1 billion in a two-part bond deal on Jan. 4. It priced another $1 billion in 4.25% senior notes due 2017 in a drive-by offering on Jan. 31. This came just one month after it priced $1 billion in 5.875% senior notes due 2017 on Dec. 5, 2011. Ford Motor Credit priced more than $4.96 billion in junk bonds in 2011.
Ford also refinanced its $9 billion revolver in March, extending the maturity of this corporate checkbook to November 2015 from November 2013. [About $300 million of commitments on the facility were not extended and still mature in 2013, but the credit line also grew by $400 million.]
A Ford spokesman declined to comment on Fitch’s upgrade, but the company issued a statement saying it was very pleased.
The automaker still faces challenges, particularly in an uncertain economic recovery. The auto market is subject to the macro economic forces and the high and low ties of consumer confidence, and is also vulnerable to shifts in commodity prices and oil prices, although Fitch noted that the company has a net cash position of almost $10 billion that will give it ample liquidity to withstand a downturn.
Patel said that car sales are a good indicator concerning the state of the economy as a whole in that they are a function of consumer confidence not just in the short-term economy but in economic stability going forward.
D’Vari agrees, but notes that Americans are often dependent on autos and a certain level of auto trading is constant even in bad times. “People can only delay maintenance and purchase of a new car for so long,” he said. “The car industry has a huge beta to unemployment, because people feel comfortable if they have a job to make payments and go out and get that car. The good part about it, auto as a sector from a consumer credit point of view was no where as hurt as the residential market.”
