Interesting little tidbit...0.0 Financing is killing Ford's ratings...
NEW YORK (Reuters) - Standard & Poor's on Friday cut its long-term debt rating for Ford Motor Co. (NYSE:F - News) and its finance arm to two notches above "junk" status, on concern about restructuring prospects for the world's No. 2 automaker.
S&P's outlook for Ford is "negative," meaning another rating cut is more likely than an upgrade. Ford had $162 billion of debt as of Sept. 30, S&P said.
The downgrade might boost the automaker's borrowing costs as Chief Executive Bill Ford cuts jobs and closes plants as part of the company's nine-month-old turnaround plan. The restructuring includes at least $6 billion of cost cuts, and Bill Ford called for another $1 billion on Monday.
"Ford has to improve its cost position and beef up its product offerings," Scott Sprinzen, an S&P auto analyst, said in an interview. "The reality of the marketplace is that it has to stay competitive on pricing, which is a moving target."
Ford wants to generate $7 billion in pretax profits annually by the middle of the decade. Last week the Dearborn, Michigan-based company posted a $326 million third-quarter net loss and said falling stocks had doubled its U.S. pension fund's underfunded status, to $6.5 billion from $3.2 billion a quarter earlier.
"Pension liabilities are a major factor in our downgrade," said Sprinzen. He said the new rating reflects Ford's long-term need "to devote significant resources to its pension fund."
Allan Gilmour, Ford's chief financial officer, said in a statement that Ford's restructuring is "on track" and that the downgrade "does not reflect the fundamental strength of our business."
Ford shares were down 16 cents at $8.70 in midday trade on the New York Stock Exchange. They began the year at $15.72.
S&P cut the long-term debt ratings of Ford and Ford Motor Credit Co. one notch, to "BBB," its second-lowest investment grade, from "BBB-plus." It affirmed their "A-2" short-term debt ratings.
S&P said it may downgrade Ford again if it doubts the automaker will show sustained earnings improvement, and break even in its auto operations outside Ford Credit, in 2003.
FALLING MARKET SHARE, RISING INCENTIVES
S&P on Oct. 16 cut its long-term ratings for General Motors Corp. (NYSE:GM - News), the No. 1 automaker, to "BBB," largely on pension concerns, but with a "stable" outlook. It put Ford's ratings on review the same day. Many analysts expected a Ford downgrade.
"I was not at all surprised," said Steven Bocamazo, vice president in fixed-income research at Loomis, Sayles & Co. in Boston, who does not own Ford bonds. "Ford has offered generous incentives to move its products, and people are concerned that consumers may soon be fatigued of these incentives, or the economy may keep people from making big-ticket purchases."
Ford is losing market share to its larger rival. Ford's 2002 U.S. car and truck sales through September totaled 2.6 million vehicles, down 6.8 percent from a year earlier. GM's sales rose 2.1 percent, while U.S. sales overall rose 1.2 percent.
"We got out of Ford last year when it became apparent its product mix didn't appear as strong as GM's," said Steven Jones, who oversees $800 million as director of fixed income at Missouri Valley Partners in St. Louis. "It doesn't seem like the fundamental picture is improving for Ford."
Ford and GM are offering interest-free financing on many vehicles. Analysts fear this may create a permanent "price-cutting" atmosphere that could threaten future profits.
FINANCING OPTIONS
Gilmour said Ford has "manageable" pension liabilities, with no mandatory contributions due before 2006. He said Ford's auto operations have nearly $26 billion of cash, and Ford Credit has "very strong" liquidity and funding flexibility.
Ford Credit has said it plans next year to issue up to $32 billion of debt, largely in the asset-backed market.
S&P's Sprinzen said, "It is a concern for any large finance operation to be dependent on a single source of financing. On the other hand, the auto sector in ABS is a big and liquid market."
Moody's Investors Service rates Ford's and Ford Credit's senior debt "Baa1" and "A3," respectively, two notches and one notch above S&P. It rates their short-term debt "P-2," equal to S&P's "A-2. The Moody's outlook is also "negative."
Ford Credit's 7.25 percent notes maturing in 2011 yield about 9.61 percent, or 5.5 percentage points more than 10-year U.S. Treasuries, up from 5.35 percentage points on Thursday, traders said. A rising spread means investors see more risk. (Additional reporting by Dena Aubin and Nancy Leinfuss in New York and Tom Brown and Justin Hyde in Detroit.)
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