“The downgrade of Ford’s rating reflects the erosion in the company’s global business position and the challenges it will face implementing its Fitness Redesign program,” Moody’s said in its research note. It cited softening margins in North America; a reversal of fortunes in China, where pre-tax earnings have swung from $70 million in the first half of 2017 to a $633 million loss in the first half of 2018; and continued losses in Europe, which it said are likely to worsen because of costs incurred in the United Kingdom from Brexit.
The move comes as Ford CEO Jim Hackett plans to slash $25 billion in costs by 2022 and the company plans to pare sedans like the Taurus, Focus and Fiesta from its lineup and double down on high-margin trucks, crossovers and SUVs. But investors have criticized Hackett for lacking transparency about his plans, and the company has been criticized for being slow to develop new vehicles.
Moody’s noted Ford’s own acknowledgment that its restructuring initiatives could bring $11 billion in charges and another $7 billion in related cash expenses in the next three to five years. “For example,” it said, “the company’s decision to wind down its car business in North America, which we viewed as credit-positive, reflects its willingness to make aggressively disciplined capital allocation decisions.” It also credited Ford for having $25 billion in cash liquidity and $11 billion in committed credit facilities to carry out its Fitness plan.
But it said its decision to downgrade Ford to a Baa3 rating, from Baa2, was justified because Ford’s plan will take time to produce results.
“Success could be challenged by having to address the serious performance problems in multiple business units simultaneously,” Moody’s said. “At the same time, Ford will have to continue investing in the areas critical for the future of the auto industry. These area include alternative propulsion, autonomous driving, ride sharing and connectivity. Investments will also have to be made in meeting the carbon emissions regulations in a number of regional markets,” especially China, where it said Ford “must rapidly renew its product lineup and rebuild relationships with dealers in order to regain lost market share.”
In response, Ford said it’s making progress on its plan and remains financial stable.
“Since coming through the Great Recession, Ford Motor Company has delivered year after year of solid financial results and operating cash flows,” spokesman Brad Carroll said in a statement. “The company has a strong balance sheet, which provides financial flexibility. We know we can capitalize on our strengths, bolster underperforming products and regions and disposition where we cannot make an appropriate return. We’re confident that as we do, the market will recognize our progress.”
Ford last month announced the creation of Ford Autonomous Vehicles LLC, a new business unit based in its emerging campus in Detroit, saying it planned to invest $4 billion in self-driving vehicles through 2023. Also, the automaker announced earlier this week the creation of a new product-line management organization, consisting of 10 cross-functional teams that will each oversee a distinct product line, such as urban utility vehicles and electric vehicles, and collaborate with product development, marketing teams and others to strengthen the automaker’s lineup. It will be led by Jim Baumbick, who becomes vice president, Enterprise Product Line Management, and reports to Jim Farley, Ford’s president of global markets.
Ford earned $1.1 billion in the second quarter, a nearly 50 percent decline from the prior-year period. It blamed a fire at a supplier that led to a disruption in production of its cash-generating F-150 truck and poor performance in China.