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August 30, 2018 | Ford’s Bonds Crushed on Moody’s Downgrade to One Notch Above Junk

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Ford bonds are down 4% after being downgraded to one step above junk. Moody’s outlook is negative.

Yesterday, the Detroit Free Press reported Ford Investment Rating Cut to One Notch Above Junk.

The Moody’s analysis said it “reflects the erosion in the company’s global business position and the challenges it will face implementing its Fitness Redesign program.”

Ford spokesman Bradley Carroll issued a statement within minutes that said, “Since coming through the Great Recession, Ford Motor Company has delivered year after year of solid financial results and operating cash flows. 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.”

Strong Balance Sheet?

Link: Nasdaq.Com

Moody’s Downgrade, Outlook Negative

Ford’s negative outlook recognizes the significant challenges of effectively executing the full scope of the Fitness program, and the extended time period over which material benefits might be achieved. In addition, the considerable financial and managerial resources devoted to the Fitness program will reduce Ford’s ability to contend with any unexpected cyclical downturn.

The ratings could be downgraded absent clear progress in pursuing the Fitness initiatives by early to mid-2019, with evidence that the company is on a strong trajectory for recovery. The rating could also be lowered if Ford is unable to address operational inefficiencies in each of its major regions, while at the same time showing progress under the Fitness program’s objective to generate adequate returns across all aspects of its automotive business. Evidence of such improvement could be reflected in the following areas: 1) North America: achieving an EBIT margin above 8%, maintaining market share of at least 14.5%, and lowering the breakeven level; 2) China: successfully launching new products that help grow market share, improve dealer relationships and restore historic levels of profitability; and 3) consolidated automotive operations: making steady progress toward restoring positive free cash flow.

The prospects for an upgrade of Ford’s ratings through 2020 are very modest. However, if the company is able to successfully execute the Fitness program, an upgrade, over the long-term, could be possible. This would require achieving a 10% EBIT margin in North America, and re-establishing its former competitiveness and profitability in China. Metrics that could support an upgrade include: a consolidated automotive EBIT margin approaching the high single digits, and sustainable above 8%; debt/EBITDA below 2.75x, and EBITA/interest 5.0x

What About GM?

GM’s debt was wiped out in its 2011 bankruptcy. What did GM do?

Link: Nasdaq.Com

Ford vs GM Share Price

If Ford is downgraded to Junk, there are many “investment grade” bond funds that will have to dump it. I expect that to happen, and that is what the “negative” outlook by Moody’s suggests.

Mike “Mish” Shedlock

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August 30th, 2018

Posted In: Mish Talk

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