Fitch Revises Outlook on Ford & Ford Credit to Positive; Affirms 'CCC' IDR

CHICAGO, Nov 02, 2009 (BUSINESS WIRE) -- Fitch Ratings has revised the Rating Outlook on Ford Motor Company (Ford) and Ford Motor Credit Company (Ford Credit) to Positive from Stable. Fitch has also affirmed the Issuer Default Rating (IDR) at 'CCC'.

The Positive Outlook reflects the better than expected progress on Ford's cost reduction program, production and inventory discipline that has resulted in solid pricing performance and continued market share gains. Although Fitch expects a weak rebound in industry sales in 2010, in part recognizing the hangover from the Cash-for-Clunkers program, Fitch expects that cash drains will be materially reduced and comfortably within Ford's liquidity position.

Fitch expects that industry sales will show only modest improvement in 2010, based on macroeconomic factors including increased unemployment, reduced wealth, consumer spending pressures and a higher savings rate. Other factors muting a rebound in industry sales include more limited financing capacity, potential increases in gas prices and evolving consumer thinking that may stretch average vehicle age. Nevertheless, the combination of Ford's cost reduction efforts and price performance has led to sharply reduced cash drains in a trough environment.

Fitch expects that even if U.S. industry sales were to remain flat at roughly 10.5 million vehicles in 2010, Ford's cash drain would be less than $5 billion.

As U.S. industry sales climb above an 11.5 SAAR rate, Ford should be able to achieve positive free cash flow. Although cost reductions should continue to be realized through fourth quarter-2010, the step change in fixed cost reductions have largely been completed, and margin expansion going forward will need to be derived primarily from capacity utilization and scale efficiencies associated with increases in industry volumes. The current contract talks demonstrate, however, that full labor-cost parity may still be a challenge.

A Fitch upgrade of Ford would be driven by a combination of the following (unchanged from Fitch's Aug. 29 press release): --Industry sales rebound to an annual 12 million sales level more quickly than currently forecast; --Ford's products continue to hold or gain share; --Inventory management at Ford and the industry allows Ford to hold or improve product prices; --A clear path to positive free cash flow is projected; --Liabilities continue to be managed or addressed, including the maturity of the company's bank agreement; --Independent access to capital by Ford Credit improves.

An Outlook revision back to Stable or a ratings downgrade could result from some combination of the following factors: --U.S. industry sales revert to new lows versus 2009 levels in the event of a double-dip recession; --A market disruption in oil prices which sends gas prices sharply higher and drives consumers away from vehicle purchases; --A breakdown in the supply chain resulting from further supplier bankruptcies and lack of access to capital, or from dislocations caused by the dissolution of a major competitor; --Inability of Ford Credit to obtain financing on competitive terms.

Ford is currently riding a wave of consumer goodwill resulting from its ability to avoid a direct government rescue and from favorable quality reports. Product winnowing and capacity reductions at GM and Chrysler indicate that several points of U.S. market share may be up for grabs over the next several years, with Ford in a good position to capture a portion of it. Ford's competitive product lineup across market segments, a good recent history of product introductions, and a rapid cadence of new products and refreshenings indicate that recent share gains could persist.

Ford is now realizing the benefits, through improved pricing, of its long-term efforts to match production with real (and economic) market demand, through a disciplined strategy of capacity, production and inventory management. Improved price performance remains a critical, and highly challenging, component of the industry's recovery. Ford's ability to restructure its manufacturing footprint and labor force, accelerate product introductions and improve quality measures during a period of unprecedented industry turmoil has been impressive. Over the long-term, global and U.S. over-capacity indicate that low industry margins and cyclicality will result in recurrent periods of restructuring, capacity and product obsolescence and competitor failures.

The competitive landscape will remain challenging, in terms of new capacity from transplant competitors (Kia, Volkswagen) and in terms of technologies. Ford could remain at a competitive disadvantage with better-capitalized competitors than can afford higher and more varied investments as the global transportation market evolves. Toyota's recent challenges in the U.S., in terms of quality and over-capacity, are likely to persist. Ford will remain challenged to sustain sales levels of its most high-volume products through model changes.

Nevertheless, transplant manufacturers maintain capital, technological, and manufacturing flexibility advantages that will continue to benefit their cost and competitive position. Importantly, government actions, from fuel efficiency to tax credits, will continue to have a material affect on demand and investment in the industry going forward.

The Cash-for-Clunkers program allowed Ford to better manage inventory and production during a trough sales environment, but is viewed by Fitch as simply pulling forward industry sales. The program did, however, provide other clear benefits to Ford. Ford Credit's results have benefited from better pricing in the used car market and higher lease residual values, effectively reversing a portion of earlier, severe write-downs.

In addition, the pull-forward of industry sales and production provided critical revenues to the supply base. Even though supplier bankruptcies have continued at a high level, the increased flow of money to the suppliers has relieved the critical liquidity position of the supplier base and assisted in the restructuring process. Over the next several years, a reduction in various forms of financial aid to the supply base by Ford is expected to provide incremental margin enhancement.

Ford's liquidity position remains adequate to finance dramatically reduced negative cash flows, even if they persist through 2010. Even in the weak industry recovery forecast by Fitch, Ford should be able to sustain liquidity at more than twice the minimum required level. Scheduled proceeds from the Department of Energy loans ($5.9 billion in total), contributions from Ford Credit, and working capital inflows from increased production should offset near-term operating losses persisting from weak market conditions. Ford has been able to manage its liability structure through the 2009 debt exchange and regular equity issuance.

Fitch expects that Ford will continue to tap the equity markets as conditions permit, and that Ford will issue equity to the maximum extent permitted (50%) to finance its upcoming obligations under the VEBA agreement. Fitch notes that minimal or no contributions to the company's underfunded U.S. pension obligations could create more onerous contributions at a later date given recent asset performance, but the contribution of equity for these obligations would limit the potential claim on cash over the next five years. Proceeds from Volvo are expected to be limited, and may be largely offset by retained liabilities.

Ford's cash at the end of 3Q was $23.8 billion, providing and adequate cushion in the event of persistent weakness in U.S. industry sales. The balance sheet remains burdened by debt, unfunded pensions and obligations under Ford's VEBA agreement, with only marginal improvement potential over the near term, outside of material equity issuance. Of primary concern is the December 2011 maturity of the bank agreement. Fitch expects that given Ford's operating performance and the improvement in the capital markets, Ford is in a position to address the maturity of the facility.

Solvency of the industry remains dependent on various factors, including; U.S.

(and some international) government assistance, multiple direct government aid into General Motors, Chrysler and their financial affiliates, debt guarantees for financial affiliates, the TALF program to facilitate auto loan and dealer financing, supplier guarantees, Cash-for-Clunkers and Department of Energy loans.

Although Ford has avoided direct government aid, the company has clearly benefited from the substantial liquidity injected into the industry, and the weaning of the industry off of this assistance will present challenges.

In particular, the ability of the domestic industry to economically access capital to provide competitive vehicle financing will remain a competitive disadvantage for some time versus better-capitalized transplants. However, the relatively healthy performance of auto-loan paper during the current crisis, the improvement in the used car market and residual values, the share gains by third-party lenders such as credit unions, all indicate that financing options should remain available as the government role is reduced. In particular, the growth of third-party lenders provides comfort that financing is being offered under arms-length terms, meaning that production is more aligned with real demand rather than incentive-led artificial levels that require manufacturer subsidies. Fitch views the retention of Ford Credit by Ford as a credit strength.

Operating performance at Ford's international operations showed profitability in the third quarter, although stimulus measures around the globe, and particularly in Europe, will make it challenging to sustain this performance until a global economic recovery develops. In particular, demand in Europe is expectedly to be down materially following the expiration of scrappage programs.

Fitch continues to recognize the strong linkage between the ratings of Ford Credit and Ford. In addition to the rating drivers cited for its automotive parent, continued improvement in operating performance and the ability to finance its business independent of government programs would support an upgrade for Ford Credit.

Fitch has affirmed the following ratings and revised the Outlook to Positive from Stable: Ford Motor Co.

--Long-term IDR at 'CCC'; --Senior secured credit facility at 'B/RR1'; --Senior secured term loan at 'B/RR1'; --Senior unsecured at 'CC/RR6'.

Ford Motor Co. Capital Trust II --Trust preferred stock at 'C/RR6'.

Ford Holdings, Inc.

--Long-term IDR at 'CCC' '; --Senior unsecured at 'CC/RR6'.

Ford Motor Co. of Australia --Long-term IDR at 'CCC'; --Senior unsecured at 'CC/RR6'.

Ford Motor Credit Company LLC --Long-term IDR at 'CCC'; --Short-term IDR at 'C'; --Commercial paper at 'C'.

FCE Bank Plc --Long-term IDR at 'CCC'; --Short-term IDR at 'C'; --Commercial paper at 'C'; --Short-term deposits at 'C'.

Ford Capital B.V.

--Long-term IDR at 'CCC'; Ford Credit Canada Ltd.

--Long-term IDR at 'CCC'; --Short-term IDR at 'C'; --Commercial paper at 'B'.

Ford Credit Australia Ltd.

--Long-term IDR at 'CCC'; --Short-term IDR at 'C'; --Commercial paper at 'B'.

Ford Credit de Mexico, S.A. de C.V.

--Long-term IDR at 'CCC'.

Ford Credit Co S.A. de CV --Long-term IDR at 'CCC' Ford Motor Credit Co. of New Zealand --Long-term IDR at 'CCC'; --Short-term IDR at 'C'; --Commercial paper at 'C'.

Ford Motor Credit Co. of Puerto Rico, Inc.

--Short-term IDR at 'C'.

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SOURCE: Fitch Ratings CONTACT: Fitch Ratings Mark Oline, [phone], Chicago Nathan Spunt, [phone] (Ford Motor Co.) New York Vincent Arscott, CFA, [phone], New York Christopher D. Wolfe, [phone] (Ford Motor Credit Co.) New York Media Relations Brian Bertsch, [phone], New York [e-mail] Cindy Stoller, [phone], New York [e-mail] Copyright Business Wire 2009 -0- KEYWORD: United States

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