Money Matters: Moody's Downgrades Ford to Near Junk

Matthew Guy
by Matthew Guy

Ford’s been wringing its corporate hands over stock prices for ages. While the market itself is generally rising, the Blue Oval seems to perpetually find itself in Wall Street’s basement. It is arguable that lackluster performance on this front cost Mark Fields his job earlier this year.

Things are not looking up in that department. Yesterday, FoMoCo’s credit rating was cut to Baa3 by Moody’s Investors Service, just a single notch above junk status.

Recently minted CEO Jim Hackett, formerly of Michigan furniture company Steelcase, and his merry band of Glass House denizens have recently set forth on an extensive restructuring program that could take years to complete. The automaker also bought the long-abandoned Michigan Central Station to restore it as hub for its future mobility ventures. Moody’s took a look at this activity, peered into their magic financial eight ball and said “the outlook is negative.”

Moody’s said the rating could be further downgraded if clear progress is not shown in its Fitness Redesign program by early-to-mid 2019. In fact, Moody’s described the chances of Ford’s rating being upgraded anytime through 2020 as “very modest.” Standard & Poors still rates Ford at BBB, which is two tiers above speculative.

Naturally, Ford spox raised their hands in protest, saying in a statement that the company has delivered strong financial results for nearly a decade. It also pointed to a strong balance sheet that provides financial flexibility.

The company has thrown all manner of items at its business model in an attempt to convince investors it’s worth the cash. From smart mobility (*retch*) to binning all its sedans, Ford is on a quest to reinvent itself and stem criticism from Wall Street. The amount of profit in the machine pictured at the top of this post is not lost on your author.

A decline into junk would be a disappointment to Ford after enjoying a half-dozen years of investment-grade status. Thanks to the foresight of Alan Mulally, a man who essentially mortgaged the company – including the fabled Blue Oval there on the building – for $23 billion back in 2006, the automaker avoided joining its U.S. peers in taking an embarrassing sojourn through bankruptcy during the financial crisis.

What is the road to a stock being labelled junk? A trio of ratings agencies assign grades to bonds, with AAA (Standard & Poors, Fitch) or Aaa (Moody’s) being the best or “prime.” When an investment falls below BBB- or Baa3 it becomes junk or speculative, as opposed to investment grade. There are sixteen ratings between prime and junk.

Ford’s stock has tumbled more than 20 percent, year to date, and as of this writing, sits below $10. General Motors has remained reliably above $35 since this time last year; FCA touched twenty euros earlier this year after spending all of 2016 and the first half of 2017 at half that price. The entirety of the S&P 500, meanwhile, has gained about 9.0 percent.

[Image: Ford Motor Company]

Matthew Guy
Matthew Guy

Matthew buys, sells, fixes, & races cars. As a human index of auto & auction knowledge, he is fond of making money and offering loud opinions.

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  • Palumboism Palumboism on Aug 31, 2018

    Ford has $137 BILLION dollars in debt and that's what's causing their low credit rating. GM was able to shed more debt in bankruptcy, so it only has $176 Billion in liabilities compared to Ford's $222 Billion. I knew Ford was in trouble years ago when I saw the MOUNTAIN of debt they were carrying. The credit rating agencies made the right call.

    • See 1 previous
    • Deanst Deanst on Aug 31, 2018

      Sigh. The vast majority of the debt is related to their lease and lending business. The risk with this is residual values and the ability of fords customers to service their loan/lease obligations. Only a small part of the debt is related to the manufacturing business. GM has less debt because it had to rebuild its consumer finance business after bankruptcy.

  • Namesakeone Namesakeone on Sep 01, 2018

    Part of me wants to assure my Ford-fan self that the stock price is but one indicator of success. There are many ways to increase a stock price. One of the fastest is to buy back treasury stock--which does nothing for the actual health of the company, but sure makes the stockholders happy. Increasing real-world productivity--introducing a promising new product, which would take procuring new facilities, designing and developing said product, hiring and training new people--if successful, also increases the stock price...years from now. Too many corporations are choosing the former over any other plan of action, simply because the stockholders, lusting for a huge payday (right now, please), demand it. I was hoping for some indication that Ford was bucking the trend and going for the long-term solution. Then I remembered that Ford is in the process of discontinuing most of its passenger car lines to "concentrate" on what is selling now, and leaving themselves hugely vulnerable to a change in the economy and what may be in demand X-years from now. So much for my faith in Ford. I hope I'm wrong, but I don't think this is the time to buy.

  • Tane94 Glad VW continues to invest in sedans and offer consumers fresh options, unlike gm, ford and Stellantis.
  • Mike-NB2 Is it safe to assume that they'll adopt the 241 HP iteration of the engine in the current GTI? The current version of the GLI is the first one not neutered to keep it below the GTI, so they might boost the power or not. I guess we'll know soon.
  • Tassos of all the GM vehicles I got to extended test drive in the 90s, the only one that was not god-awful was the Northstar Eldorado. I really liked it.Well researched comprehensive article, Corey.
  • 3-On-The-Tree Korea was one of my best assignments in the Army. You’re exactly correct. Very nice and courteous people, outstanding food. My wife and son came over to visit me as I was there doing a two year un-accompanied tour and they had a wonderful time. Yes that factory was more advanced than anything in the states it was pretty impressive as was the ship factory. I never felt unsafe over there as opposed to here.
  • Laflamcs How about lowering the prices on Jeep products? I read somewhere that their sales have fallen 30%+ at the same time their prices have gone up 30%+. My wife has a stick shift 2018 Renegade Latitude that has been flawless for 80K miles - but if we were to replace it we would be hard pressed to spend so much money on another Jeep product, as they discontinued the Renegade and expect the Compass to take up the slack. And doesn't other world markets get a hybrid Renegade?
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