Ford's rating outlook downgraded by Moody's; investors concerned

Ford Motor's rating outlook was downgraded from stable to negative, which does not harm the company’s credit now but alerts Wall Street that the situation is dynamic.

The latest Moody's rating outlook indicates an increased chance of a Ford credit rating downgrade in the next 12 to 24 months, which would increase borrowing costs and further alarm investors.

“The negative outlook reflects the challenges Ford will face in implementing its ‘Fitness Redesign’ initiatives” and restoring operating performance that is more solidly supportive of its sound credit rating, wrote Bruce Clark, senior vice president at Moody’s Investors Service in New York.

“During the past 18 months, the company has allowed an erosion in many of the operating disciplines that it established following the 2009 restructuring of the North American auto sector. These disciplines supported strong performance through 2016. In addition, Ford is contending with the disruptive changes being caused by the auto sector’s move toward vehicle electrification, autonomous driving and ride sharing.”

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He said Ford’s “ability to stabilize its outlook” will be determined by the pace at which it can address its challenges.

“We expect that Ford’s operating performance will remain under pressure into 2019,” Clark wrote. “An additional challenge facing Ford, and the entire auto industry, is the need to allocate capital judiciously across an expanding range of potential investment opportunities such as geographic markets, vehicle categories, drivetrain technologies, joint ventures/partnerships and the various business models related to ride-sharing, etc.

"This capital reallocation process could result in sizable restructuring expenditures should Ford decide to exit major businesses, product categories or markets. If such restructurings occur, they could place additional pressure on Ford’s already weak near-term financial performance and on its liquidity position. This added stress would have to be balanced against the timing, magnitude and certainty of the anticipated restructuring benefits.”

Moody’s noted that Ford currently has a sound liquidity position supporting its automotive operations, with a year-end 2017 gross liquidity of $37.4 billion, consisting of $26.5 billion in cash and marketable securities and $10.9 billion in committed credit facilities.

“The ratings could be downgraded unless Ford’s ‘Fitness’ program shows clear signs of progress,” Clark wrote.

Prospects for an upgrade of Ford’s ratings through 2020 are “very modest,” according to Moody’s, which alerted the potential for a cyclical slowdown in the automotive industry.

While ratings are not recommendations to Wall Street, investors subscribe to alerts that help guide financial activity. Investors globally use the ratings to determine credit risk and overall investment decisions.

Ford CEO Jim Hackett indicated when he took the job in May 2017 that he would provide a concrete plan in 100 days on how the Dearborn-based company would move forward in making market gains. What Hackett presented his plan in October 2017, stock activity suggested that investors were underwhelmed. Ford has seen its stock stagnate and fall while other automakers have seen their stock prices rise.

Hackett was widely viewed, in succeeding Mark Fields at CEO, as someone who would move the stock price and position the company to be more competitive in electrification, specifically related to China.

"Since coming through the Great Recession, Ford Motor Company has delivered year after year of solid financial results and operating cash flows," said Brad Carroll, Ford spokesman. "The company has a solid balance sheet, with $37.4 billion of liquidity, which provides financial flexibility. In addition, we continue our intense focus on improving the operational fitness of the business to deliver stronger results while building toward our vision of the future. We’re confident that as these fitness actions take hold, the market will recognize our progress."

Ford stock dipped below $11 on Tuesday. The 52-week low is $10.47.

George Kaleniecki, 68, of Detroit retired from Ford after 42 years as a tool and die maker. "This is my retirement. I was an hourly worker. I want to see Ford succeed."

Ford shareholders remain hopeful, having seen Ford emerge from challenges in the past, said Robert Wiseman, senior associate dean at the Eli Broad College of Business at Michigan State University. "They're going through a period of transition as they look to the future of the auto industry. Recent acquisitions suggest they're rethinking how to compete. For the present, it may not look good, but I'm not giving up my stock."

Contact Phoebe Wall Howard: phoward@freepress.com or 313-222-6512. Follow her on Twitter @phoebesaid