Fitch Affirms Ford & Ford Credit IDRs to 'BBB-'; Outlook Stable

Mon Apr 22, 2013 3:44pm EDT

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(The following statement was released by the rating agency) NEW YORK/CHICAGO, April 22 (Fitch) Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) for Ford Motor Company (Ford) and its Ford Motor Credit Company LLC (Ford Credit) captive finance subsidiary at 'BBB-'. The Rating Outlook for both Ford and Ford Credit is Stable. A full list of the rating actions taken on Ford and each of its subsidiaries follows at the end of this release. KEY RATING DRIVERS Ford's ratings are supported by the automaker's strong liquidity position, relatively low leverage, improved North American profitability and positive free cash flow (excluding voluntary pension contributions). In general, the company's competitive product portfolio and lower cost structure has put it in a solid position to withstand the significant cyclical and secular pressures faced by the global auto industry. Importantly, Ford's ratings are based on Fitch's projections that the company has sufficient financial flexibility to maintain an investment-grade credit profile throughout a period of severe economic stress. Although Ford's financial position has improved significantly since the last downturn, the company continues to face numerous risks. Chief among these is continued uncertainty regarding the durability of global auto demand. Although worldwide vehicles sales continue to rise, very weak demand in Western Europe and declining sales growth rates in many emerging markets has slowed the pace of sales growth over the past three years. The lack of demand in Europe has led Ford to undertake a significant restructuring program there that will constitute a material use of cash over the next two years. At the same time, Ford continues to make substantial cash investments in Asia and Latin America to strengthen its presence in those developing markets. This heightens the need for the company to continue performing well in the competitive North American market, as cash generated in North American will essentially be used to subsidize the company's overseas activities for the next year or two. Additional risks to Ford's credit profile include a relatively high absolute debt level, a large pension deficit, highly competitive industry dynamics and increasingly stringent global safety and emissions regulations. Ford's ratings are based, in part, on Fitch's detailed analysis of the impact that a severe downturn in the automotive market would have on the company's credit profile. Given Ford's operating leverage, working capital profile, and capital expenditure needs, Fitch expects Ford would burn a substantial amount of cash in a downturn scenario. However, Fitch believes the company's automotive net cash position of $10 billion at year-end 2012, along with other sources of liquidity, would provide it with the ability to withstand this cash decline without falling into financial distress. In addition, Ford has discretion with regards to certain planned cash deployment actions that could further relieve liquidity pressures in a downturn, such as delaying capital spending, reducing voluntary pension contributions, and paying down debt only at maturity (as opposed to making prepayments). Changes in Ford's business profile over the past several years have also put it in a better position to face another downturn. The company's break-even sales level has declined as a result of its restructuring actions over the past several years, and its more balanced product portfolio has put it in a better position to weather the likely mix shift to smaller vehicles that would accompany an economic downturn. The Western European market continues to be very challenging for mass-market manufacturers, and Ford's sales in the region declined significantly last year. In 2012, wholesales in Ford's European segment (including some joint venture sales) declined 16%, while revenue in the segment fell 21%. Ford's market share in the region fell 140 basis points to 7.9% as the company attempted to avoid discounting and, in the fourth quarter, cut production to reduce dealer inventories. In October 2012, Ford announced several significant restructuring actions to improve its European cost structure, including the planned closure of two plants in the U.K. in 2013 and the planned closure of its assembly plant in Genk, Belgium in 2014. The plant closures will result in an 18% decline in Ford's installed vehicle assembly capacity in the region and will generate estimated gross cost savings of $450 million to $500 million annually. Ford also plans to strengthen its market position by introducing 15 new vehicles in the region by 2017. The combination of market weakness and the significant restructuring actions will drive heavy losses in Ford's European segment over the next two years, with Ford currently projecting that it will incur an approximately $2 billion pre-tax loss in Europe in 2013, slightly worse than its loss in 2012. By mid-decade, these restructuring actions could help Ford to earn a pre-tax profit in the region, although this will also require some improvement in market conditions, as well. In terms of product, Ford's vehicle lineup has performed relatively well in the post-recession period, particularly in North America. Ford's light vehicle market share in the U.S. rose each year between 2008 and 2011, although it declined somewhat in 2012 as Japanese automakers' sales got back on track following the 2011 earthquake. Model changeovers and the discontinuation of the Crown Victoria and Ranger also contributed to the market share decline. Ford's sales in 2012 were also limited by the company's capacity, with demand for its vehicles outstripping its ability to produce them. Thus far in 2013, Ford's market share has risen on the strength of new models, primarily the new Fusion and Escape. The new models are also expected to support continued net pricing gains. The upcoming introduction of new full-size pickups from General Motors Company (GM) will increase the competitive pressure in the full-size pickup segment, but the fuel efficiency of Ford's F-series trucks, particularly those with the EcoBoost V-6 engine, should help to support sales in the face of heavier competition. Ford's liquidity position strengthened in 2012 as the company increased the size of its revolving credit facility and modestly grew its cash and marketable securities balances. Total automotive cash and marketable securities at year end 2012 was $24 billion, and, including about $9.5 billion of availability on the company's primary revolver, total liquidity exceeded debt by over $19 billion. In March 2012, Ford amended and extended its secured revolving credit facility, increasing the limit and extending most commitments to November 2015 from November 2013. As a result of the amendment and extension, Ford now has $9.3 billion in commitments that mature in 2015 and an additional $307 million that mature in November 2013. Fitch's calculation of automotive free cash flow (automotive cash from operations less capital expenditures and dividends) was only $44 million in 2012, down from $5.1 billion in 2011. However, the 2012 figure included $2 billion of discretionary pension contributions. Other factors affecting Ford's 2012 free cash flow included a $1.2 billion year-over-year increase in capital spending to support the company's products and growth programs and $763 million of dividends resulting from the reestablishment of the company's dividend in the first quarter of 2012. Cash used for working capital also increased by $1.8 billion in 2012 compared with the 2011 level. Automotive free cash flow (as calculated by Fitch) is likely to be negative in 2013, as the company makes $3.4 billion of discretionary contributions to its pension plans. Also pressuring free cash flow in 2013 will be higher capital spending, estimated by the company at $7 billion, and increased dividend payments. In January 2013, Ford doubled the size of its dividend, suggesting that dividend payments will be about $800 million higher in 2013 than in 2012. Despite the near-term pressures on Ford's free cash flow, Fitch expects the company's liquidity to remain relatively strong and financial flexibility to remain good. Ford has various options to preserve liquidity, if necessary, including a reduction in the level of voluntary pension contributions. Ford's automotive EBITDA margin (as calculated by Fitch) declined to 7.0% in 2012 versus 7.4% in 2011 as higher losses in certain markets, particularly Europe, put downward pressure on the company's profitability. Even with the margin decline, overall profitability remained relatively strong, however, driven by higher net pricing and sales growth in North America. The weak market conditions outside North America, along with negative foreign exchange effects, also resulted in a 1.3% decline in automotive revenue to $127 billion. The slight decline in revenue and the lower margin led to a decline in Fitch-calculated EBITDA to $8.8 billion versus $9.5 billion in 2011. Ford's leverage is relatively low for the 'BBB-' rating category. In 2012, Ford drew the remaining amounts available on its secured Advanced Technology Vehicles Manufacturing (ATVM) program loan from the U.S. Department of Energy (DoE), contributing to a $1.2 billion net increase in debt to $14 billion. Combined with the lower level of EBITDA produced during the year, leverage rose to 1.6x at year-end 2012 from 1.4x at year-end 2011. Lease adjusted leverage rose to 1.9x from 1.7x. In January 2013, Ford issued $2 billion of senior unsecured notes, using $593 million to retire its 7.5% debentures due 2043 and earmarking the remaining $1.4 billion for voluntary pension contributions. Despite the net increase in debt in 2012 and early 2013, Fitch expects Ford will pay down debt over the intermediate term as it continues to work toward its mid-decade goal of reducing automotive debt to about $10 billion. As of year-end 2012, Ford's global pension plans (including certain unfunded non-U.S. plans) were underfunded by a total of $19 billion, of which $9.7 billion was in the U.S. Ford is not expected to have any required contributions to its U.S. pension plans in 2013, but, as noted above, the company plans to contribute a total of $5.4 billion to its global plans in 2013, including $3.4 billion of voluntary contributions, primarily in the U.S. Also included in the $5.4 billion figure is $400 million in direct payments that Ford expects to make to unfunded plans. Although the discretionary contributions will reduce Ford's free cash flow in 2013, and the increase in debt used to fund a portion of them has raised the company's leverage, they demonstrate Ford's intent to reduce the level of liabilities on its balance sheet while maintaining a high level of liquidity. In addition to the voluntary cash contributions, Ford is also rebalancing the plans' asset mix, de-risking the plans by weighting assets more heavily toward fixed income investments with cash flows that more closely match the plans' expected payment streams. Ford also began offering lump-sum distribution options to certain U.S. salaried retirees during 2012, and as of year-end 2012, $1.2 billion of pension obligations had been settled via lump-sum distributions. The ratings of Ford Credit are directly linked to Ford. Fitch considers Ford Credit to be a 'core' subsidiary of Ford due to its importance to Ford, as demonstrated by the high percentage of Ford vehicles sales financed by Ford Credit, and the strong operational and financial linkages between the two companies. The ratings also reflect Ford Credit's improved credit profile, consistent operating performance, solid credit quality, adequate liquidity and risk adjusted capitalization. Ford Credit's loss to global receivables ratio measured 0.16% in 2012, the lowest on record. Fitch believes that net loss rates have bottomed and will modestly increase over the next few quarters, driven by seasoning of recent vintage loans, portfolio growth, and expected moderation in used car prices. Operating performance normalized in 2012 as benefits from reserve releases and residual value gains from lease returns diminished. Fitch expects portfolio expansion and improved funding costs will help maintain profitability in 2013. Ford Credit's access to unsecured debt markets has consistently improved post-crisis, due to general improvement in capital markets, solid performance of the auto asset class throughout the crisis, and the improved credit profile of its parent. Management has lowered its managed leverage (net debt to equity) target to 8.0x to 9.0x to increase financial flexibility and maintain a stronger balance sheet, which is viewed positively by Fitch. RATING SENSITIVITIES Ford's Stable Rating Outlook suggests that a near-term change in the company's ratings is not likely. Longer term, Fitch could consider a positive rating action if the company's margins and free cash flow continue to grow, resulting in further financial flexibility. This would most likely be the result of continued increases in both net vehicle pricing and market share in Ford's primary markets, while operating costs remain contained. Further declines in debt and pension obligations could also contribute to a positive rating action. An increase in the proportion of sales in emerging markets, particularly China, could be a factor in a positive rating action, as well, since it would lessen Ford's reliance on the mature North American and Western European markets. Fitch could consider a negative rating action if a very severe downturn in the global auto market leads to a significant weakening of Ford's liquidity position. As noted earlier, however, Fitch has already incorporated into the ratings the effect that a severe downturn would have on Ford's credit profile. Fitch could also consider a negative rating action if the company increases its long-term debt to finance an acquisition or fund shareholder-friendly activities, neither of which is currently expected. Problems with operational execution or declining market share trends could also result in a negative rating action, particularly if combined with a market downturn. Ford Credit's ratings will move in tandem with its parent. Any change in its strategic importance or a change in Fitch's view on whether Ford Credit remains core could change this rating linkage with its parent. A material increase in leverage, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio, could become restraining factors on the parent's ratings. Fitch affirms the following ratings with a Stable Outlook: Ford Motor Company --Long-term IDR at 'BBB-'; --Senior secured credit facility at 'BBB-'; --Senior unsecured notes at 'BBB-'. Ford Motor Co. of Australia --Long-term IDR at 'BBB-'. Ford Motor Credit Company LLC --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Senior shelf at 'BBB-'; --Senior unsecured at 'BBB-'; --Commercial paper (CP) at 'F3'. Ford Credit Europe Bank Plc --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Senior unsecured at 'BBB-'; --CP at 'F3'; --Short-term deposits at 'F3'. Ford Capital B.V. --Long-term IDR at 'BBB-'; --Senior unsecured at 'BBB-'. Ford Credit Canada Ltd. --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Senior unsecured at 'BBB-'; --CP at 'F3'. Ford Credit Australia Ltd. --Long-term at 'BBB-'; --Short-term IDR at 'F3'; --CP at 'F3'. Ford Credit de Mexico, S.A. de C.V. --Long-term IDR at 'BBB-'. Ford Credit Co. S.A. de C.V. --Long-term IDR at 'BBB-'; --Senior unsecured at 'BBB-'. Ford Motor Credit Co. of New Zealand Ltd. --Long-term IDR at 'BBB-'; --Short-term IDR at 'F3'; --Senior unsecured at 'BBB-'; --CP at 'F3'. Ford Motor Credit Co. of Puerto Rico, Inc. --Short-term IDR at 'F3'. Ford Holdings, Inc. --Long-term IDR at 'BBB-'; --Senior unsecured at 'BBB-'. Contact: Primary Analyst (Ford) Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst (Ford) Craig D. Fraser Managing Director +1-212-908-0310 Primary Analyst (Ford Credit) Mohak Rao, CFA Director +1-212-908-0559 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst (Ford Credit) Katherine Hughes Associate Director +1-3212-368-3123 Committee Chairperson (Ford) Mark A. Oline Managing Director +1-312-368-2073 Committee Chairperson (Ford Credit) Joo-Yung Lee Managing Director +1-212- 908-0560 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Evaluating Corporate Governance' (Dec. 12, 2012); -- '2012 Outlook: U.S. Auto Manufacturers and Suppliers' (Dec. 17, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Finance and Leasing Companies Criteria' (Dec. 11, 2012); --'2013 Outlook: U.S. Finance and Leasing Companies' (Nov. 15, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Evaluating Corporate Governance here 2012 Outlook: U.S. Auto Manufacturers and Suppliers here Rating FI Subsidiaries and Holding Companies here Global Financial Institutions Rating Criteria here Finance and Leasing Companies Criteria here 2013 Outlook: U.S. Finance and Leasing Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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