TEXT-S&P revises Ford's outlook to positive
Overview -- Ford Motor Co.'s (Ford) performance in North America continues to support good overall automotive cash flow and profitability. -- We believe Ford will act with increasing decisiveness and commitment to restructure Europe to profitability in the face of likely several more years of weak vehicle sales in Europe. -- We are revising our outlook to positive from stable and affirming our 'BB+' corporate credit rating on Ford. -- We could raise the rating to investment grade if, among other factors, Ford demonstrates it can improve the balance of profitability across regions. Rating Action On Aug. 10, 2012, Standard & Poor's Ratings Services revised its outlook on Ford Motor Co. and Ford Motor Credit Co. LLC (Ford Credit) to positive from stable. We affirmed our corporate credit ratings on the companies at 'BB+'. We also revised the outlook on the counterparty credit rating on FCE Bank PLC, Ford Credit's European bank, to positive from stable and affirmed our 'BBB-' rating. Rationale The outlook revision reflects, among other things, our view that Ford will act with increasing decisiveness and commitment to restructure Europe to profitability amid prospects for several more years of weak vehicle sales there. If we believe Ford is on track to be profitable in Europe, this would improve the balance of profitability across regions and support an investment-grade rating. Accordingly, we would likely want to have a good understanding of 2014 prospects for profitability by region before an upgrade and do not expect to raise our rating on Ford until then. Indeed, we assume that profits and cash use in Europe will get worse before they get better. Standard & Poor's rating on Michigan-based Ford reflects our assessment of Ford's business risk profile as "fair" and its financial risk profile as "significant," according to our criteria. Factors we consider include Ford's prospects for generating free cash flow and profits in its automotive manufacturing business because of improvement in its U.S. competitive position, the continuing recovery in U.S. industry sales, and its improved cost base in North America. Our base case assumes improvement for industry light-vehicle sales in North America in 2012 and 2013. We estimate Ford's automotive operating cash flow (before separation payments) during 2012 will be at least $2 billion to $3 billion (roughly equivalent to about 10% of estimated adjusted automotive and postretirement debt in 2012). We also assume Ford can sustain its pretax EBIT margin in North America in the upper-single-digit percentage area and in the mid-single-digit area in total for automotive operations. We assume Europe will report losses. We believe Ford's automotive operations in North America would remain profitable if industry light-vehicle sales fall well below the current level of 14 million but remain more than 11 million units. But cash flow will be sensitive to volume and cost headwinds--including commodity prices and other cost increases--and future production volatility, which could temper year-over-year cash flow generation. As the inventories of the Japanese automakers continue to recover, some non-Japanese automakers in the U.S. are losing market share, as we expected. We assume automakers competing in the U.S. market will continue to demonstrate the same discipline observed since late 2009 regarding the level of production and inventories relative to sales and that they will avoid excess inventories, incentives, and swings in production. We believe underlying industry and business risks persist, most notably: -- Continuing exposure to the weak recovery in vehicle demand in key global markets, and declining sales in Europe because of economic weakness and political uncertainty; -- The eventual return in North America to more typical levels of industry volatility in sales and production; and -- Ford's still-high dependence on light trucks, particularly full-size pickups, for profitability in North America, although new car introductions in recent years have fared well. We expect Ford's financial results to remain highly sensitive to future industry sales and product mix, actions by competitors, and other factors beyond its direct control (e.g., as higher raw material costs or fuel prices). Our ratings reflect, among other factors, our expectations that: -- Ford's profitability in North America will continue; -- Ford will generate global automotive operating cash flow of $2 billion to $3 billion in the next few years; -- Retail market perception of Ford's products will not deteriorate; -- Ford's adequate liquidity and substantial cash balances will persist; and -- Losses and cash use in Europe in relation to the overall company will be manageable because of continued North American profits and positive cash flow. Our economists forecast U.S. light-vehicle sales of about 14.1 million units in 2012, about 11% higher than 2011. Sales in the first seven months of 2012 have been about this annual rate after being considerably higher earlier in the year. We expect the rebound in light-vehicle sales to continue next year with about 14.7 million units. However, international markets have not performed well so far this year. South America generated a modest operating profit of $59 million while Asia-Pacific generated an operating loss of $161 million in the first half of the year. A variety of factors including industry capacity, competition, political matters relating to trade and foreign currency access, and product investments are driving the weaker results. Still, the largest risk factor, in our view, remains Europe. Our outlook for the major auto markets in Europe, Ford's second-largest market, is much less positive than for the U.S. market. We expect 2012 auto industry sales in Europe to be at least 5% below 2011--EU27 passenger car registrations were down 6.8% for the first six months of 2012 (but highly mixed: France was down 14.4%, Germany was up 0.7%). We believe losses in Europe for many nonluxury volume makers are likely for 2012 and perhaps 2013, primarily because of the excess capacity and a weak economy. We assume any losses or cash use in Europe will not become substantial enough to affect the ratings. Ford Credit's results continue to be solidly profitable, partly because of higher sales volumes, industrywide strength in used-vehicle prices (lower costs related to lease residuals), and reduced credit losses as consumer credit quality stabilizes at many financial institutions. Ford Credit reported a pretax profit of $438 million in the second quarter of 2012. We assume earnings in 2012-2013 will be lower than in past years because of less favorable developments on used-car residuals and credit reserves, but still solidly profitable. Liquidity We view Ford's liquidity as "adequate" under our criteria. We expect liquidity in Ford's automotive operations to remain substantial, and we assume Ford will continue generating positive free cash from automotive operations in 2012 and 2013. But our liquidity assessment also takes into account the automotive businesses' potentially substantial use of cash from working capital during periods of production declines. Sources of liquidity consist of Ford's automotive cash, cash equivalents, and marketable securities, which totaled $23.7 billion as of June 30, 2012; approximately $9.2 billion available under the revolving facility, which expires in 2015 (a small amount in excess of $9.2 billion expires in 2013); and other automotive credit lines. Availability under the unsecured revolver is not subject to a borrowing base or material financial maintenance covenants in this facility, and so we expect Ford to remain in compliance. Uses of liquidity include capital expenditures of about $5 billion for 2012, with mid-decade guidance of $6 billion. We believe this is realistic because spending could increase to support regulations, technology, and new products during the next few years. We view automotive-related debt maturities as manageable for the next several years at $1.3 billion or less each year between 2012 and 2016. Ford plans pension contributions of about $3.8 billion in 2012, and we assume further large contributions will occur as part of the pension derisking strategy. Ford Credit relies heavily on the wholesale funding markets, especially the securitization markets, to fund its automotive finance business, and we believe this market has recovered well. But the company has also been issuing unsecured debt recently, improving its funding mix. We believe securitization markets for auto-related asset-backed securities will remain much more available than they were during the last downturn. Nonetheless, we will closely monitor Ford Credit's ability to continue funding. Recovery analysis For the complete recovery analysis, please see our recovery report on Ford to be published following this report on RatingsDirect. Outlook The positive outlook reflects our view that there is a one-in-three chance that we could raise our corporate credit rating on Ford to investment grade within 18 months--although this is not likely before late 2013. The most important factor in an upgrade to investment grade would be Ford's ability to improve the balance of profitability across regions. For an upgrade, we would expect Ford to be on track for sustainable profitability outside North America, particularly Europe--although, as noted, we think results in Europe will worsen before improving. We could raise the rating if, in addition to regaining control over its ability to be profitable in Europe, the gradual improvement in light-vehicle demand continues in most other global markets and Ford's prospects for generating free cash flow and profits in its automotive manufacturing business continue to solidify such that the following factors were met: -- Ford sustains debt to EBITDA at about 2.5x; -- Pretax automotive profit margins reach the mid-single-digit area for total automotive and the high-single-digit area for North America; -- Liquidity at the automotive parent remains more than $30 billion; -- Automotive-related operating free cash flow remains at about 15% of debt; -- Ford successfully copes with the evolving competitive structure of the global auto industry, including continued demonstration of the preferences of the U.S. consumer toward Ford products, and Ford develops reasonable prospects for profitability in developing markets such as China; and -- Ford Credit continues to be profitable and demonstrates underwriting standards consistent with an investment-grade rating. For the current rating, we assume Ford's revenues will grow at a low-single-digit pace and pretax margins will remain about 5%, supporting automotive operating cash flow (as reported) of $2 billion to $3 billion. We could revise our outlook to stable or lower our rating if adverse economic or competitive developments (e.g., prolonged sales decline, overproduction, excess inventory, increased incentives, or unfavorable shifts in customer demand) reduced the prospects for profitable and cash-positive results, or if Ford uses a substantial amount of cash in its automotive operations in any quarter and it seemed likely to continue. Related Criteria And Research -- July U.S. Auto Sales Remain In Line With Standard & Poor's 2012 Full-Year Expectation, Aug. 2, 2012 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Ford Motor Co. Ford Credit Australia Ltd. Primus Financial Services Ltd. Ford Motor Co. of Australia Ltd. Corporate Credit Rating BB+/Positive/-- BB+/Stable/-- FCE Bank PLC Counterparty Credit Rating BBB-/Positive/-- BBB-/Stable/-- Ford Motor Credit Co. LLC Counterparty Credit Rating BB+/Positive/-- BB+/Stable/-- Ratings Affirmed Ford Motor Co. Senior Secured BB+ Recovery Rating 3 Senior Unsecured BB+ Recovery Rating 3 Senior Unsecured cnBBB+ FCE Bank PLC Senior Unsecured BBB- Ford Credit Canada Ltd. Senior Unsecured BB+ Ford Holdings Inc. Senior Unsecured BB+ Recovery Rating 3 Ford Motor Co. Capital Trust II Preferred Stock B+ Ford Motor Credit Co. LLC Senior Unsecured BB+ U.S. Leasing Corp. Senior Unsecured BB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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