Debt Rating Upgrade Fuels Ford Resurgence
Despite Ford’s surging stock price, new models and rising customer confidence there’s always been that one bone of contention which had divided peoples’ opinion: debt. $35 billion of it. Though they’ve tried to restructure it, selling new shares and raising cash throughout 2009, it’s still a problem. But apparently it’s becoming less of a problem. ABC news report that Fitch Ratings upgraded their assessment of the risk of Ford defaulting on its debt obligations, basing their optimistic view on a better economic environment, the company’s stronger margins, increased market share and cash position. Oh yes, and a small matter of $5.9b in federal DOE retooling loans [full Fitch release here]. Ford’s Credit unit also received a hearty slap on the back from Fitch because of its improving access to capital, as its rating was raised from “CCC” to “B-“. But let’s not get carried away. While this is a positive step in Alan Mulally’s vision of a sustainable Ford, the rating still qualifies Ford debt as non-investment grade.
Fitch was the last of the three major debt raters (with Moody's, S&P) to move Ford and FMCC out of the highly-speculative category. And it is keeping the outlook positive, indicating potential further upgrades. With a $39B market cap today (from under $6B a year ago), fixing the balance sheet through debt buy-backs and equity issuances is now possible.
Ford will probably be in the black next year. $22 billion is owed to banks and other financial institutions, $7 to the VEBA and $6 to the DOE. The DOE loan doesn't require payments for years and more than likely is interest free. The bank loans can be refinanced over and over again (it's what the banks want, they make money on interest not principle), Ford has been paying down (they paid $2 billion early in the 3rd Q) and refinancing on a regular basis (this is why the ratings are so important from CCC to B will probably save them 1% as they refinance the debt related to finance.) Barring a repeat of Nasser and an economic collapse worse than last year, Ford will be fine.
@ Telegraph Road: I have to disagree with your interpretation of a B- rating. Anything below BBB- (Fitch/S&P) is considered junk or non-investment grade, and most references that I'm familiar with do classify a B- as highly speculative. A C grade means there is an imminent risk of default, so going from CCC to B- is a big step, but I think most potential buyers would still consider Ford debt highly speculative. That isn't to downplay the importance of this change by Fitch, which I think Cammy did in his post. This is very good news for Ford. It will reduce the interest they have to offer, it substantially cuts the cost of counter-party insurance for buyers, and it opens them to a much larger pool of potential buyers. Pension funds and insurance companies are required by law to only buy investment-grade securities, but bond funds have internal rules that limit the amount of sub-investment grade debt they can invest in, and how much they can acquire at a given level. All of it means that Ford's costs of servicing this debt are going to go down, and when you're talking about $35 billion lowering the cost by even fifty basis points (I suspect it is going to be more) is going to add up to a lot of money.
This is a game of small moves... - Stock price UP - Cost to refi/insure debt is dropping - VEBA is done, which improves cash flow - Car and Truck of the year - Gaining market share - New products... Ford is doing great.... I just hope they are ready for interest rates to go up... In the next round of the recession we get high interest rates or currency devaluation or some of both.