Yesterday, Moody's Investment Services dropped some bad news on Ford as they have downgraded their credit rating to Baa3 - one rung above speculative grade.
Analysis by the investment service said the downgrade "reflects the erosion in the company's global business position and the challenges it will face implementing its Fitness Redesign program."
The erosion that Moody's is referring to includes,
- Profit margins in North America beginning to soften due to higher costs
- Continuing losses in Europe and concerns of it getting worse due to Brexit
- Strains in the Chinese and South American markets
Moody's said that downgrading Ford's credit rating further isn't out of the question.
"The ratings could be downgraded absent clear progress in pursuing the fitness initiatives by early to mid-2019, with evidence the company is on a strong trajectory for recovery."
Downgrading Ford's credit rating will make it harder for the automaker to get money from investors.
“There are many investors who currently purchase Ford’s debt that would be unable to do so. That means many investors would have to sell their bonds. It means that there are investors that Ford can currently go to to get money and might not be able to do that in the future,” explained Bruce Clark, senior vice president at Moody’s to the Detroit Free Press.
In a statment, Ford spokesman Bradley Carroll said the company has been delivering solid financial results "year after year" and believes the market will come around to see their progress.
“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,” said Carroll.
Ford's Fitness Redesign program will see the company assessing their portfolio "with the goal of restructuring, contracting or exiting businesses that will not be able to generate adequate returns. Restructuring initiatives could entail $11 billion in charges with $7 billion in related cash expenditures over the next three to five years," Moody's wrote.
We've already seen some of this as Ford announced they would be dropping most of their carline up to focus on trucks and utility vehicles back in April.
"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," said Moody's.
But there is one major concern Moody's says in their report Ford still needs to address. Ford hasn't been fully clear with proving more details about the program.
"At the same time, I think Ford needs to be even more transparent. Where’s their five-year plan? Fiat Chrysler has done an amazing job communicating their plan. General Motors has done a good job communicating their strategy. I can’t say I have that same clear vision from Ford,” said Rebecca Lindland, executive analyst at Kelley Blue Book.
"The alarm bells should have been going off awhile in Dearborn. Had Ford really had a bullish outlook with China, they might have kept Aston Martin, Volvo or Jaguar Land Rover" — brands it sold, said Dave Sullivan, manager of product analysis for AutoPacific Inc.
"Ford is trying to add more crossovers, but they are late to market by years. FCA and others got in while the market was hot. I think the opinion from many on Wall Street is that Ford is a one-trick pony and that pony's name is F-Series."
Source: Detroit Free Press