Analysts with Moody's Investors Service said they are giving Ford Motor Co. and General Motors Corp. six months to prove themselves worthy of their current ratings. Speaking at Moody's' Auto Securitization Briefing last week, Bruce Clark, senior vice president in the financial institutions group, gave a run-down of areas Moody's will be watching over the next six months to decide whether to hold or drop the ratings of the two manufacturers.
Clark said market share is a key concern for GM, now rated Baa3' with a negative outlook. "We will be looking for the company to maintain 26% market share," he said. This could signal bad things to come since GM has already seen its sales drop 6.7% in 2005 over last year. The same concern applies for Ford, also rated Baa3' with a negative outlook, which has a 19% market share. Ford, however, is not in the same straights as GM in terms of its sales.
Another area of concern is that the benefits costs faced by the companies and how those will impact the companies' balance sheets. GM has Other Post Employment Benefits, or OPEB, obligations of $61 billion and Voluntary Employee Benefits Associations, or VEBA, obligations of $20 billion, all combining to cost the company around $5 billion per year. Ford has OPEB obligations of $32 billion and VEBA of $9 billion for an annual cost of $4 billion.
Both companies, however, have aces in the hole when it comes to their huge cash reserves, Clark pointed out. GM has an $18 billion liquidity position and Ford has a $22 billion liquidity position. "Liquidity is a very important issue. It does not give [the companies] better fundamental credit, but it does give them time," he said. The companies could literally burn two to three billion dollars per year and still not be in danger of substantially reducing their liquidity, he added.
Both also can be aided by their relationships with their financing arms. GM with a $1.5 billion relationship to General Motors Acceptance Corp., and Ford with a $4.9 billion connection to its financing arm, Ford Motor Credit.
In terms of structural concerns, Clark said GM's initiatives so far are "not terribly inconsistent with what Moody's expected." He pointed primarily to GM's recent announcement that it would cut 25,000 manufacturing jobs in the U.S. by 2008, noting that the number is not that much greater than the company's normal attrition rate.
Clark said Moody's has set periodic benchmarks in the six to nine month range for the two companies in order to be as transparent as possible about what it expects to see from them. However, those timeframes could be accelerated if market conditions require it. Moody's will be "relatively deliberate in making its ratings decisions" on the two companies, he said. Clark also indicated that Moody's is "unlikely to bypass the review process." Looking to 2007, Clark said both companies should have EBITA margins of 4%, fixed-charge coverage of 3.5 to 4 times, and a free cashflow to adjusted debt ratio of 15%.
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