Moody’s Cuts Ford’s Credit Rating to “Junk” – Testing Times for the Auto Industry?

Earlier this week it was announced that Moody’s had downgraded Ford’s credit rating to Ba1, the highest rating level within Moody’s’ so-called ‘junk’ category, or in other terms its classification of non-investment grade. There are a number of factors to consider, however, in analysing the situation above and beyond the obviously negative headlines that have accompanied this rating action.

Moody’s have been the first of the Big Three credit rating agencies to downgrade Ford into this non-investment grade classification, with S&P and Fitch maintaining Ford’s credit rating at two rungs above non-investment grade. In the title to this post, the question is asked of whether there are testing times for the automotive industry currently and, in providing their reasoning for the downgrading of Ford’s credit rating, Moody’s appear to believe that this is not the case: ‘The erosion in Ford’s performance has occurred during a period in which global automotive conditions have been fairly healthy’. Furthermore, in May, Moody’s upgraded Ford’s rival Fiat Chrysler (to the same Ba1 status) on account of ‘strong SUV and truck sales in North America’. It therefore appears that Ford is on a downward spiral, but it is being suggested that the entire automotive marketplace is suffering and is in the process of making significant changes to the way the market moves forward. Industry onlookers have stated that the Ford downgrade is ‘an unfortunate inevitability of where we are in the cycle for the auto industry… they have this massive restructuring underway and all the auto companies are trying to figure out how to deal with autos 2.0’. This market refocusing has been likened to ‘turning around a battleship’ and, currently, that is what Ford is trying to do.

Apart from attempting to reduce the costs of modernisation – Ford and Volkswagen have joined forces to reduce the cost of R&D regarding the electrification of the market – Ford have also begun a massive restructuring process. In June they announced that up to 12,000 jobs would be cut in Europe, which followed news in May that 7,000 jobs worldwide would be cut, representing 10% of its salaried workforce. These cost-cutting strategies are part of an $11 billion overhaul that aims to protect Ford’s position moving forward. However, this week’s announcement has seen opinion become divided over whether that task has just gotten that much harder. Analysts at Bank of America Merrill Lynch have suggested that investors understand this downgrade to be ‘sufficiently idiosyncratic’, although other investors are said to be concerned that companies are happy to issue debt whilst being at the bottom of the investment-grade classification – that fear is based upon the fact that worsening economic conditions around the issuing companies may lead to the inability to service those debts, which could lead to downgrades and a vicious cycle which could put those issuing companies in real danger.

At the moment Moody’s is of the opinion that Ford, whilst deserving of the downgrade, is in a healthy-enough position – its reserves outweigh its debt obligations. However, the chances of Ford moving back into investment-grade is considered slight by Moody’s, who have suggested it could be a number of years before that happens. With Ford currently undertaking a massive restructuring, the timing could not be worse – the potential impact upon Ford’s borrowing capabilities could be massive (particularly as the largest investors are usually regulatory-bound to only invest in investment-grade bonds). Also, the external environment for American auto manufacturers is certainly not stable, with the market being used within the tariff war being waged between the US and China – an increase on tariffs combined with a decreasing demand for their products means that the US automotive market is in a potentially very precarious position indeed. In summation, whilst some are declaring that the downgrade will potentially have little impact, it is probably correct to suggest that the downgrade could not have come at a worse time. If we also consider that the other members of the Rating Oligopoly may be more inclined to reduce Ford’s credit rating now that Moody’s has broken rank, the impact could be particularly significant. It is imagined the next few months will see Ford attempt to convey the narrative that the restructuring is on track and is, ultimately, having a positive effect. Whether that is true or not remains to be seen.

Keywords – Ford, automotive, cars, business, trade war, @finregmatters