Auto manufacturer's ability to generate cash flow may determine likelihood
of another downgrade.
January 6, 2006
NEW YORK (Reuters) - Standard & Poor's slashed its ratings on Ford Motor Co.
deeper into junk territory Thursday, citing a slide in market share and
doubts about the auto manufacturer's ability to turn around its North
American auto operations.
S&P also cut its ratings on Ford's finance arm, Ford Motor Credit, deeper
into speculative grade. Most of Ford's $142 billion of consolidated debt is
issued by Ford Credit.
The downgrade came a day after Ford reported a 9 percent drop in December
sales, hurt by steep declines in sport utility vehicles. For the year,
Ford's sales were down 4.4 percent.
Ford has seen its profit margins squeezed by fierce competition from foreign
rivals and a slowdown in sales of large SUVs due to high gasoline prices.
Turmoil at General Motors Corp.also could become a "huge problem" for Ford
if GM ever files for bankruptcy protection, S&P analyst Scott Sprinzen said
on a conference call.
"If GM got all the benefits of a Chapter 11, that would leave Ford in a
situation that certainly couldn't be stable," Sprinzen said.
Cash flow key to rating
Ford is expected to unveil a major restructuring plan Jan. 23, including
plant closings and job cuts, but even that might not be adequate to
stabilize the company if GM were to file for bankruptcy, Sprinzen said.
GM is not in immediate danger of a bankruptcy, Sprinzen added, although he
had previously said a bankruptcy is not "far-fetched" if present trends
persist. GM has denied speculation that it would seek Chapter 11 protection.
"We remain committed to accelerating our business plan," Ford spokeswoman
Becky Sanch says. "We'll have more to say about our plan on Jan. 23 and
can't comment further at this time."
GM's troubles have already spilled over because Ford has been forced to
match the sales incentives GM offered last year, S&P analyst Robert Schulz
S&P cut its ratings on Ford and Ford Credit by two notches to "BB-minus,"
the third-highest junk rating, from "BB-plus." The outlook is negative,
meaning another downgrade is likely during the next two years.
Ford's ability to generate cash flow may decide whether it gets hit with
another downgrade, S&P said.
"Ford would need to reverse its current financial and operational trends,
and sustain such a reversal, before we would revise its outlook to stable,"
Bonds shrug off rating
The downgrade was widely anticipated by the credit market. Ford's bonds were
little changed on the news after being modestly higher in price all morning,
along with the broader market.
Ford's 7.45 percent bonds due in 2031 traded at 70.5 cents on the dollar,
unchanged on the day, according to MarketAxess. Those bonds have lost about
30 percent of their value during the past 12 months.
Ford's shares rose 34 cents, or 4.24 percent, to $8.35 on the New York Stock
The credit derivatives market, which moves rapidly on news, did not react to
the downgrade. Five-year default protection on Ford debt was quoted around
945 basis points, about 15 basis points tighter.
Yet another $.02 worth from a proud owner of a 1970 Mach 1 351C @