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Ford Motor Co. Outlook Revised To Developing From Negative On Progress In Reducing Cash Use[/FONT]
- Ford has slowed it cash use significantly and has shown early signs of stabilizing its U.S. market share.
- However, Ford continues to use cash from its global automotive operations.
- We are revising our outlook on Ford and related entities to developing from negative and affirming the ratings.
- The developing outlook indicates that we could raise or lower the
corporate credit rating during the next year.
NEW YORK (Standard & Poor's) July 27, 2009--Standard & Poor's Ratings Services today said it has revised its outlook on Ford Motor Co. and related entities to developing from negative. At the same time, we affirmed our ratings, including the 'CCC+' issuer credit ratings on Ford and Ford Motor Credit Co. LLC, as well as the 'B-' ratings on FCE Bank PLC, Ford Credit's European bank, maintaining the one-notch rating differential between FCE and its parent, Ford Credit.
"The outlook revision reflects early signs of progress by Ford in reducing cash use from its automotive operations and stabilizing, if not improving, its U.S. market share," said Standard & Poor's credit analyst Robert Schulz.
The company reported that it used $1.2 billion in cash, including cash restructuring costs and upfront subvention payments to Ford Credit, in its global automotive operations in the second quarter of 2009, much less than that used in the two previous quarters ($4.0 billion in the first quarter of 2009 and $7.4 billion in the fourth quarter of 2008).
In our view, there is now potential for us to raise Ford's ratings in the next year or so, although the possibility for a downgrade remains significant.
For example, we could consider raising the rating under the following scenario:
- If Ford's cash use and losses from global automotive operations continue to diminish significantly, leaving sustainable cash balances of at least $15 billion;
- If Ford improves its highly leveraged capital structure, including addressing its bank credit maturity profile; and
- If Ford is able to cope successfully with the evolving competitive
structure of the global auto industry.
However, we could still lower the rating on Ford if continued weakness in the global auto market for the remainder of 2009 and in 2010 and a very slow global economic recovery prevent Ford from further stemming its cash use, as this would reduce liquidity and, in our view, increase refinancing risk from the company's sizable bank debt maturities in late 2011.
Also, we still believe that the very fragile state of the interrelated auto supply base poses some risks to Ford's liquidity.
The cash use is being caused by weak auto sales in almost every market, but especially in the U.S. and Europe.
Our economists forecast U.S. light-vehicle sales of about 9.9 million units this year, the lowest in nearly 40 years and down 25% from the 13.2 million units sold in 2008.
We currently expect sales to rise to 11.2 million units in 2010, but even with this improvement, sales would still be 15% below the weak levels of 2008.
The outlook for other major auto markets, including Europe, will also remain bleak, in our view, until economic stabilization becomes apparent.
We expect sales in Europe to be lower in 2010 than in 2009, in part because of a shifting of sales from various government scrappage incentives. Ford and other high-volume automakers in Europe have benefited from these incentive plans in 2009, but we believe the boost to sales will be short-lived.
We believe Ford still faces the possibility of falling below the necessary levels of cash to run its automotive business--but perhaps not in 2009, given the progress it has shown in the first half of this year.
We
estimate that this could occur if cash use in its automotive operations, including restructuring charges, exceeded about $12 billion total in 2009 and 2010.
In our view, the most likely catalysts for cash use of this magnitude would be if auto sales remained unchanged or worsened in 2010 from already weak 2009 levels, or if another spike in gas prices caused renewed pressure on Ford's product mix, which is still heavily weighted toward light trucks despite the company's successful initial steps to enhance its small and midsize car offerings.
We believe fundamental business risks will remain unchanged well into 2010 at least, most notably the company's exposure to weak vehicle demand globally, but also the substantial execution risk of the company's ongoing restructuring and repositioning.
Items that Ford can address over time, such as its manufacturing overcapacity, labor costs, and product line-up, may not, in our view, be sufficient to produce any meaningful free cash flow in the immediate future, although a stabilization of industry sales, even at low levels, would lead to lower cash use in 2009.
Ford stated that the relatively strong second-quarter cash performance may not continue in the third quarter.
Industry sales remain weak in nearly all of Ford's key sales regions. Consequently, we expect Ford's cash use to continue through the end of this year and perhaps into 2010; however, in our view, there is an increasing likelihood that cash use will be measurably lower than it was in 2008 as the company benefits from slashed costs and reduced outflows from working capital effects.
We believe Ford may avoid revisiting its informal request for $9 billion in loans from the U.S. government if industry sales begin to recover later this year. If the government were to eventually provide funding, we stress that we would likely view such assistance as buying more time rather than as solving the automaker's fundamental business risks, especially deteriorating global demand.
We believe Ford Credit has been less constrained recently than its peers in its ability to provide financing for Ford customers; this and other factors have contributed to Ford's market share stabilization.
Ford Credit relies heavily on the short-term debt and securitization markets to fund its automotive finance business, and these markets have been affected by the broader capital market turmoil.
But we believe the auto-related asset-backed securities (ABS) markets are showing signs of improvement. In our view, Ford Credit's various existing rated retail auto loan securitizations are currently performing within our rating expectations.
We believe the company has limited unencumbered assets it could use to support additional borrowing. Ford said it is exploring a possible sale of its Volvo unit, although under the terms of Ford's credit agreement, half of the proceeds from any Volvo sale must be used to repay secured debt. We do not expect Ford to sell a stake in Ford Credit.
The developing outlook indicates our view that there is at least a one-in-three possibility that we could raise or lower the corporate credit rating during the next year.
We could consider revising the outlook to positive or raise the rating if, among other things, the global light-vehicle sales outlook begins to show sustained improvement, if Ford's prospects for generating free cash flow and profits in its automotive manufacturing business improve significantly, and if the fragile supply base does not cause a significant reduction in Ford's liquidity.
For example, we could raise Ford's rating if its cash use and losses continue to diminish significantly, leaving sustainable cash balances of more than $15 billion; if Ford's capital structure--including its bank credit maturity profile--improves; and if Ford demonstrates an ability to cope successfully with the evolving competitive structure of the global auto industry.
We could revise the outlook back to negative or review the rating for a downgrade if continued weakness in the global auto market in the remainder of 2009 and in 2010 and a very slow global economic recovery prevents Ford from reducing its cash use much further, preventing profitability and changes to its bank debt maturity structure.
We could lower the ratings if, among other things, we believed cash balances would drop significantly below $10 billion at any time, although in our view, this is increasingly less likely to occur in 2009. We believe the most likely trigger for a financial restructuring or bankruptcy filing remains a reduction in cash balances approaching levels that are insufficient to operate the business, caused by low vehicle sales and production rather than by any decision to file for bankruptcy to further improve its cost structure.
http://www.chicago-blog.it/index.php/2009/08/government-motors-e-i-tesoretti-della-bad-company/
