Fitch Affirms Ford & Ford Credit's IDRs at 'BBB-'; Outlook Revised to Positive

Tue Apr 22, 2014 11:40am EDT

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(The following statement was released by the rating agency) 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 has been revised to Positive from Stable. A full list of rating actions taken on Ford and its subsidiaries follows at the end of this release. KEY RATING DRIVERS: FORD Ford's ratings continue to be supported by the automaker's strong liquidity position, relatively low leverage, and improved North American profitability. The revision of the Rating Outlook to Positive from Stable reflects Fitch's expectation that over the intermediate term the company's European profitability will continue to improve, automotive debt will continue to decline, and the geographical diversification of the company's unit sales will continue to grow. In addition, the Positive outlook reflects the significant improvement in the funded status of the company's pension plans. Overall, Ford's increasingly competitive product portfolio and lower cost structure have positioned the company to withstand the significant cyclical and secular pressures faced by the global auto industry. Incorporated into Ford's ratings is Fitch's expectation 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 the inherent cyclicality of the global auto market, which remains tied to global economic conditions. In particular, although the Western European market appears to have stabilized, the recovery remains tenuous, and Fitch does not expect a return to pre-crisis levels in the near term. Geopolitical issues, such as the recent events in Ukraine, also pose a risk for Ford and other global automakers. The industry remains exposed to volatility in fuel prices and raw material costs, which can affect vehicle demand and profitability. Technological change and the need to meet increasingly stringent emissions and safety regulations also pose risks, as does the highly competitive nature of the industry, with the potential for manufacturers from developing markets such as China and India to ultimately move into more mature markets. Although Ford will have to contend with these risks over the long term, the company's improving product portfolio, strong liquidity, declining debt levels, reduced pension obligations, and lower cost structure have put it in a better position to effectively meet these challenges while competing alongside strong competitors from Asia and Europe. Ford's ratings continue to be based, in part, on Fitch's forecast of the impact that another severe downturn in the global automotive market would have on the company's credit profile. With the company's operating leverage, working capital profile, and capital expenditure needs, Fitch expects that Ford would burn a substantial amount of cash in a downturn. However, Ford's automotive net cash position of over $9 billion at year-end 2013, along with additional sources of liquidity, would provide it with a sufficient flexibility to withstand a severe decline in cash without falling into financial distress. Ford also has some discretion in how it deploys its cash that could further relieve liquidity pressures in a downturn, such as delaying certain capital expenditures, making only mandatory pension contributions, and repaying debt only at maturity. Other changes in Ford's post-recession business profile have also positioned it to better withstand another downturn. The company's break-even sales level has declined as a result of restructuring actions and an increased use of global platforms, its product portfolio is more balanced and less reliant on large truck sales, and its sales mix is more globally diversified. The geographical diversification of Ford's sales has been increasing, helping to lessen the company's reliance on the mature North American and Western European markets. Although the company will remain highly leveraged to the North American market over the intermediate term, and it still has significant work ahead of it to reach the level of diversification of some of its global peers, Ford has made significant inroads into important developing markets, particularly China. In China, Ford's Focus is one of the top selling vehicles in the country, while the company's line-up of small and midsize sport utility vehicles (SUVs) has given it a strong product offering in a growing segment. Ford's market share in China grew to 4.1% in 2013, up from 3.2% in 2012. In the first quarter of 2014, Ford's sales in China rose 45%. Although Ford's operations in China are conducted through unconsolidated joint ventures, the country remains a key component of the company's long-term growth strategy, and dividends from the joint ventures will be an increasingly important source of cash going forward. The European market continues to be challenging, but economic conditions appear to be stabilizing, industry sales are rising and Ford's performance in the region is getting stronger. Through March 2014, Ford's vehicles sales in the 20 European markets that it tracks have risen on a year-over-year basis in each of the last 10 months. In the first quarter of 2014, Ford's European sales were up 11% versus the first quarter of 2013, and its market share in the region was up 30 basis points to 8%. At the same time, Ford's customer mix has improved somewhat, with the percentage of sales to daily rental car fleets and dealer registrations declining by 100 basis points to 27%. Ford's reorganization remains on-track, with two smaller U.K. factories closed in mid-2013 and the Genk, Belgium facility still targeted for closure in late 2014. After posting a pre-tax loss of ($1.6) billion in the region in 2013, Fitch expects the combination of growing sales and an improving cost structure to result in a meaningfully better financial performance in Europe over the near term, including the potential to generate a positive pre-tax profit in the region in 2015, although the economic recovery in the region remains somewhat fragile. In North America, Ford is in the midst of a heavy product roll-out in 2014 that is likely to result in lower wholesale deliveries and an increase in structural costs. The 16 new or heavily refreshed vehicles slated to begin production in the latter half of 2014 include the new F-150, the Transit full-size van and the new Mustang. Although, North American pre-tax profit will likely be down in 2014 as a result of the launches, the refreshed vehicle line-up should provide a tailwind for the company heading into 2015. The aluminum-intensive F-150 is the most notable new vehicle, as the F-150 is both Ford's highest-selling vehicle in North America and among its most profitable. As a result, the significant changes to the vehicle present some risk, both in terms of production roll-out and customer acceptance. Notably, however, Ford has stated that the new F-150 will contribute to the company meeting its U.S. Corporate Average Fuel Economy targets, a meaningful change from prior versions of the truck, which worked against the company meeting the target. This will provide the company with a near-term competitive advantage, as it will not need to offset F-150 sales with increased sales of smaller cars. It may also help support higher pricing in the highly competitive full-size pickup segment. Ford's liquidity position remains strong, with automotive cash and marketable securities at year end 2013 totaling $25 billion. Including nearly $11 billion of primary revolver availability, total liquidity exceeded debt by nearly $20 billion. At the same time, Ford's leverage remains low for its rating category. EBITDA leverage (debt/Fitch-calculated EBITDA) rose to 1.9x at year-end 2013 from 1.6x at year-end 2012, but funds from operations (FFO) adjusted leverage declined to 1.5x from 1.6x over the same period as FFO grew. Ford ended 2013 with about $16 billion in debt, up from $14 billion at year-end 2012, while EBITDA (as calculated by Fitch) declined somewhat to $8.5 billion from $8.8 billion. The Fitch-calculated EBITDA margin declined to 6.1% in 2013 from 7% in 2012. Over the intermediate term, Fitch expects Ford's leverage to decline as the company works toward its $10 billion mid-decade automotive debt target. Fitch also expects Ford's margins to improve as it moves past the heavy launch activity and restructuring in 2014. Automotive free cash flow (as calculated by Fitch) is likely to be pressured and could be negative in 2014 despite a significant decline in pension contributions, as Ford increased its dividend by 25% in the first quarter and capital spending is forecast to be higher as well. Ford's capital spending forecast is roughly $7.5 billion in 2014, up from $6.6 billion in 2013, while dividends are likely to total about $2 billion versus $1.6 billion in 2013. Operating cash flow is likely to be lower than the 2013 level as well, as structural costs increase to support the company's heavy launch activity during the year, including the 16 new or refreshed vehicles in North America. Although free cash flow could be negative in 2014, Fitch expects Ford's overall liquidity balance to remain strong, even as the company reduces debt by over $1 billion, mostly by making amortization payments on outstanding loans. After 2014, Fitch expects Ford's free cash flow will improve as the items constraining it in 2014 abate, and the company benefits from new model introductions and the wind-down of its restructuring in Europe. The funded status of Ford's pension plans has improved significantly over the past several years. As of year-end 2013, Ford's global pension plans (including certain unfunded non-U.S. plans) were underfunded by $9 billion, an improvement of $9.7 billion from the funded status at year-end 2012. Most of the improvement was in the U.S., where the company's plans were underfunded by only $2 billion at year-end 2013. On a percentage basis, Ford's U.S. plans were over 95% funded, a significant reversal from the steep underfunding seen immediately after the recession. Ford contributed $5.4 billion to its global pension plans in 2013, including $3.4 billion in discretionary contributions to its U.S. plans. In 2014, Ford plans to contribute $1.9 billion to its global funded and unfunded pension plans, most of which will be required contributions to non-U.S. plans, as the company is not likely to have any required U.S. contributions. Ford has noted that it intends to contribute between $1 billion and $2 billion annually to its global funded plans in 2015 and 2016, which will allow the company to fully fund and de-risk its funded plans. Once fully funded and de-risked, the company has noted that contributions will likely run in a range of only $500 million to $700 million per year to cover service costs. KEY RATING DRIVERS: FORD CREDIT The rating affirmation of Ford Credit and its affiliates reflect the direct linkage to Ford's ratings. 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 improving credit profile, consistent operating performance, peer superior asset quality, and adequate liquidity and risk adjusted capitalization. Ford Credit's managed portfolio increased 13% to $103.4 billion in 2013 from $91.7 billion in 2012 (the fastest pace since 2008) largely driven by increase in net operating leases and non-consumer finance receivables, which grew 35% year over year. Lease portfolio measured $18.3billion at year-end 2013, but is still well below the pre-crisis peak of $29.7 billion in 2007. Fitch notes that leasing is a relatively riskier strategy as it further exposes the company to residual value risk, particularly when used car values are expected to weaken. However, Fitch believes that Ford Credit has a good track record in managing its residual value exposure and expects the company to be prudent in setting residual values on new lease originations. Fitch also believes that Ford's improved quality and line-up of fuel efficient vehicles should generate stronger resale values relative to historical levels. Operating performance slightly improved in 2013 as favorable factors such as higher financing volume were offset by higher loss provision expense and lower residual value gains. Fitch expects Ford Credit will generate strong profitability in 2014 but does not expect material improvement over 2013, as increased volume from healthy U.S. auto sales will likely be offset by tighter pricing/margins due to increased competition, higher provision expense from expected credit normalization, higher borrowing costs as the company shifts to a more unsecured funding mix, and lower residual value gains. Asset quality continued to outperform its peers with Ford Credit reporting the second lowest level of losses in its history. Fitch expects asset quality will continue to normalize given portfolio seasoning and softening in used car values. Ford Credit's global loss to receivable ratio measured 0.18% in 2013, up 2 basis points from 0.16% in 2012, and compares favorably to peers. Allowance for loan losses has been prudently managed and measured 0.37% in 2013, offering a solid coverage over net losses. Managed leverage, calculated by the company, measured 8.5x in 2013, up slightly from 8.3x in 2012, but firmly in-line with management's target range of 8.0x - 9.0x. Fitch believes Ford Credit's relatively higher leverage is reflective of its higher quality loan/lease portfolio, which has shown superior credit performance relative to its captive peers. Funding and liquidity continues to improve as the company is reducing its reliance on secured funding sources, which should offer greater funding flexibility in times of stress and result in larger pool of unencumbered assets benefiting unsecured creditors. Short-term debt, both on an absolute basis and as a percentage of total debt, has been increasing post-crisis. Fitch recognizes the motivation to fund short term, as these sources are often less costly; however, overreliance on short-term funding can be very problematic during times of market duress, as was proven in the recent financial crisis. Currently, short-term debt is at a reasonable level of Ford Credit's total debt base (15.2% in 2013), especially considering the short-dated assets such as the commercial floorplan receivables on the balance sheet. However, a material increase in short-term funding would be viewed negatively by Fitch. RATING SENSITIVITIES: FORD Positive: Further developments that may, individually or collectively, lead to a positive rating action include: --Continued growth in the company's margins and free cash flow; --Continued progress toward the company's $10 billion mid-decade debt target; --Further improvement in the funded status of the company's pension plans; --Additional geographical diversification in the company's revenue stream, especially a further increase in Chinese sales; --Continued performance toward meeting the company's mid-decade European profitability target; --The successful roll-out of the company's 23 new or heavily refreshed global vehicles, including 16 in North America. Negative: Further developments that may, individually or collectively, lead to a negative rating action include: --A very severe downturn in the global auto market leads to a significant weakening of Ford's liquidity position; --An increase in long-term debt to finance an acquisition or fund shareholder-friendly activities; --Problems with operational execution or declining market share trends. RATING SENSITIVITIES: FORD CREDIT 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 has affirmed the following ratings. The Rating Outlooks have been revised to Positive from Stable: Ford Motor Company --Long-term IDR at 'BBB-'; --Unsecured 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 IDR 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) Sean Sexton Managing Director +1-312-368-3130 Committee Chairperson (Ford Credit) Tara Kriss Senior Director +1-212-908-0369 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage ' (Aug. 5, 2013); --'Automotive Insights Quarterly - First Quarter 2014' (Jan. 22, 2014); --'2014 Outlook: U.S. Auto Manufacturers and Suppliers (Modest Global Demand Growth Leads to Stable Credit Profiles)' (Jan. 22, 2014); --'Global Financial Institutions Rating Criteria' (Jan. 1, 2014); --'Finance and Leasing Companies Criteria' (Dec. 11, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'2014 Outlook: U.S. Finance and Leasing Companies' (Nov. 22, 2013) --'U.S. Auto Asset Quality Review: 4Q13' (Feb. 27, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Automotive Insights Quarterly — First-Quarter 2014 here 2014 Outlook: U.S. Auto Manufacturers and Suppliers (Modest Global Demand Growth Leads to Stable Credit Profiles) here Global Financial Institutions Rating Criteria here Finance and Leasing Companies Criteria here Rating FI Subsidiaries and Holding Companies here 2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist) here U.S. Auto Asset Quality Review: 4Q13 (Easing Underwriting Will Weigh on Credit Performance) 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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