UPDATE 2-S&P boosts Ford closer to investment grade

Fri Oct 21, 2011 2:06pm EDT

* Moody's rates Ford 2 notches below investment grade

* Fitch says Ford is 1 notch below investment grade

* J.P. Morgan says expects Ford dividend within half year

* Ford shares up 3.2 pct in afternoon

Oct 21 (Reuters) - Ford Motor Co is within one notch of investment grade credit rating at two of the three major ratings agencies after Standard and Poor's Ratings Service on Friday boosted the automaker two notches up its ratings ladder.

S&P said the outlook for Ford is "stable."

This follows an upgrade of one notch by Fitch Ratings on Thursday. Fitch also rates Ford at BB+, the highest level of "speculative" or "junk" status, one notch below the lowest "investment grade" rating.

Moody's Investors Service has Ford rated two notches below its lowest level of investment grade. Moody's rates Ford at Ba2 on its credit risk ladder.

Ford was last at investment grade in 2005, the year before it borrowed heavily to finance its restructuring.

On Wednesday, Ford unionized workers voted nearly 2-to-1 to ratify a new four-year labor deal between the automaker and the Untied Auto Workers.

Ford said on Thursday the new labor deal would increase costs less than 1 percent annually, and higher bonuses would be offset by savings in more flexible manufacturing processes and work schedules.

S&P said of the new four-year labor contract, "We believe the contract will allow for continued profitability and cash generation in North America. Ford has a two-year track record of profits and cash flow generation in its global automotive operations, supported by strong performance in North America."

S&P analyst Robert Schulz said Ford's automotive operating cash flow in 2011 will be "at least" $5 billion.

S&P also said the company has "good prospects for generating at least $2 billion in automotive cash flow in 2012."

Fitch said a further upgrade to BBB-, investment grade, or higher is likely if Ford stays on a course for lowering its debt to $10 billion by 2015 as the automaker plans. Ford's debt at the end of the second quarter was $14 billion.

S&P on Friday also raised the rating for Ford unit Ford Motor Credit Co LLC to BB+ from BB-.

Ford Chief Financial Officer Lewis Booth said on Thursday that the company may reinstate a dividend before the ratings agencies certify it as investment grade, but did not offer an estimate on the timing of the dividend.

J.P. Morgan in a research note said on Friday, "We think a dividend is likely in the next six months, but we expect Ford to start at a fairly small or modest yield initially with the aim of announcing progressive dividend increases in the future."

Ford shares were up 3.2 percent at $12.07 on Friday afternoon on the New York Stock Exchange.

Ford shares are up 29 percent since the automaker's negotiators reached a tentative labor contract with the UAW on Oct. 4. In that same stretch of time, the S&P 500 is up 12 percent.

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