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Old 10-23-2003, 09:01   #1 (permalink)
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U.S.A.:Ford Says Credit Watch Unwarranted

Forbes
Robyn Meredith

Ford Motor said today that a warning of a potential downgrade of Ford's credit rating was unwarranted. "I was somewhat surprised," said Nicholas V. Scheele, Ford's chief operating officer, in an interview at the Tokyo Motor Show.

"We had just beat the [Wall] Street estimate," Scheele said today in Tokyo. Ford (nyse: F - news - people ) also managed to cut more than $3 billion in costs this year, far above its original goal of $500 million. "We are awash in cash at both the credit company and the parent company," Scheele said.

Yesterday, Standard & Poor's Ratings Services placed Ford debt on Credit Watch, a designation that means S&P might downgrade Ford's debt in the future. If the debt is downgraded, it would become more expensive for Ford and particularly its car loan subsidiary, Ford Credit, to borrow.

S&P said the move reflects "concerns about Ford's ability to achieve more satisfactory overall financial performance amid intensifying competition in the North American and European auto markets--particularly given the lack of success the company has encountered in turning around its European operations--and considering the prospect that Ford Credit's earnings will moderate over the next year from recent record levels."

Scheele insisted Ford would meet its financial targets by ramping up cost cutting if market conditions worsen. "We will deliver our numbers," Scheele said. "We will reach our goals, and we'll take it out of costs."

Last week Ford reported that it earned 13 cents a share in the third quarter, well above the 11-cent-a-share loss analysts expected. Ford lost money selling cars but earned twice what analysts expected on car loans and other financial services. Ford also raised its earnings forecast for the fourth quarter to between 14 and 24 cents in per-share earnings, excluding one-time items.

Merrill Lynch (nyse: MER - news - people ), which carries a "neutral" rating on the stock, estimates Ford's fourth-quarter earnings will land between 5 and 25 cents a share. Deutsche Bank, which has a "sell" rating on the stock, estimates Ford's fourth-quarter earnings will hit 42 cents a share because it expects Ford Credit will post strong results in the fourth quarter.

Ford announced it would take $600 million to $650 million in charges by the middle of 2004 to further reduce its European workforce. In Europe, Ford lost $452 million last quarter, not including another $22 million in losses from Ford's group of luxury brands, primarily in Europe. Scheele said Ford would break even or earn a small profit in Europe during the fourth quarter.

"Ford's dismal performance in Europe raises particular concerns," S&P noted. "Notwithstanding extensive restructuring actions, Ford continues to incur large losses--expected to total approximately $1.2 billion this year, before special items--making it the worst performer among major industry participants."

Echoing remarks by executives from General Motors (nyse: GM - news - people ) yesterday, Scheele said the Japanese yen was too weak, helping Japanese carmakers at the expense of American automakers. The yen is now trading at roughly 110 yen to the dollar.

"It should be between 95 and 105," Scheele said. "I don't see why the second-largest economy in the world would need to have a weak currency." Japan has spent $120 billion in currency markets during the first nine months of the year in an effort to hold down the yen's value, a policy that helps Japanese exporters such as automakers.

Both Ford and GM also sounded an alarm about the persistent increase in health care costs. "We have a health care crisis, and it is the number one problem for every company," Scheele said today. He called for a national debate on the subject. "Health care costs are escalating massively above GDP growth," he said. Ford spent about $2.5 billion last year on health care costs.

GM agrees. "From a financial standpoint, it is probably the biggest area of noncompetitiveness," John Devine, GM's chief financial officer, said yesterday. "You don't have that problem in Japan."

Detroit faces huge health care bills for its aging workforce and its retirees, while foreign automakers new to the U.S. market have far fewer retirees. Because the foreign factories are largely non-union, they do not shoulder the cost of generous health care benefits for blue-collar workers mandated under United Automobile Workers labor contracts.

Devine said GM strongly favors a congressional move to guarantee payment of prescription drug benefits to Medicare recipients. The House and Senate this week have been attempting to hammer out differences between competing versions of the bill, which would guarantee the availability of prescription drug benefits to Medicare recipients.
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