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Ford's credit rating upgraded two levels by S&P

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Ford's credit rating upgraded two levels by S&P

August 2, 2010 - 11:01 am ET

NEW YORK (Bloomberg) -- Ford Motor Co.'s credit rating was raised two levels by Standard & Poor's today because of expectations the company will remain profitable and signs that customers have a better impression of the automaker's vehicles.

The rating was raised to B+, the fourth level below investment-grade, from B-, S&P said in a statement. The outlook is positive.

Ford has “substantial” cash balances and likely will continue to generate free operating cash flow, the ratings firm said. The retail market has an “improved perception” of Ford's vehicles and its efforts to introduce more fuel-efficient models in the next few years, S&P said.

“It's a step in the right direction,” said Kirk Ludtke, senior vice president of CRT Capital Group in Stamford, Conn. “It was largely anticipated. It will be a while before they get back to investment grade.”

Ford has more debt than its U.S. rivals because it borrowed $23 billion in late 2006, before credit markets froze, helping the company avoid the bankruptcies that befell General Motors Corp. and Chrysler LLC. The borrowing left Ford with obligations that CEO Alan Mulally says now put it at a competitive disadvantage.

Ford's automotive operations had $21.9 billion in cash on June 30, down from $25.3 billion on March 31. Ford paid down $7 billion in automotive debt in the second quarter, lowering it to $27.3 billion from $34.3 billion at the start of the quarter. Ford said today it will have a positive automotive net cash position by the end of 2011.

The company's annual automotive debt maturities are less than $2 billion until 2013, and the debt reduction has lowered the risk that Ford's liquidity could fall to “dangerously low levels” in the coming years, S&P said.

Ford has overhauled its vehicle lineup, redesigning cars such as the Taurus and Fusion, and adding extras like heated leather seats and voice-activated electronics. It also boosted quality, winning price gains of $1.1 billion on cars and trucks in the second quarter and helping all of its auto units worldwide to become profitable.

“Ford is making progress in stabilizing, and perhaps improving its U.S. market share,” S&P said in the statement.

PRESS RELEASE: Ford Motor Co. Rating Raised Two Notches To 'B+' On Automotive Profit, Cash Flow Progress; Outlook Positive

Ford reported a second-quarter profit, including a pretax margin of 11.2% in its North American automotive operations and positive operating cash flow from its global automotive operations.

We believe that as a gradual market recovery continues in North America, Ford's global automotive operations will generate at least low-single-digit pretax margins and positive operating cash flow in 2010, with potential for improvement in 2011.

We are raising our corporate credit rating on Ford to 'B+' from 'B-'.

We also raised the issue-level ratings on Ford's senior secured credit facilities to 'BB' from 'B-' and revised the recovery rating on this debt to '1' from '3'. We raised the issue rating on Ford's senior unsecured debt to 'B' from 'CCC' and revised the recovery rating on this debt to '5' from '6'. These changes reflect a revised recovery analysis incorporating recent debt reduction.

The outlook is positive.

NEW YORK, Aug. 2, 2010--Standard & Poor's Ratings Services today said it has raised its corporate credit rating on Ford Motor Co. and Ford Motor Credit Co. LLC to 'B+' from 'B-'. We also raised the counterparty credit rating on FCE Bank PLC, Ford Credit's European bank, to 'BB-' from 'B', maintaining the one-notch rating differential between FCE and its parent. The rating outlook on all entities is positive.

At the same time, we raised the issue-level rating on Ford's senior secured debt issues to 'BB' from 'B-' and revised the recovery rating on this debt to '1' from '3', indicating our expectation that lenders would receive very high (90% to 100%) recovery in the event of a payment default. We also raised the issue-level rating on Ford's unsecured debt to 'B' from 'CCC' and revised the recovery rating on this debt to '5' from '6', indicating our expectation that lenders would receive modest (10% to 30%) recovery.

"The upgrade reflects our reassessment of Ford's business risk profile to weak from vulnerable, and its financial risk profile to aggressive from highly leveraged," said Standard & Poor's credit analyst Robert Schulz. The positive outlook reflects our view that there is at least a one-in-three chance that we could raise Ford's corporate credit rating in the next 12 months.

We believe the company's automotive operations in North America will remain profitable with industry light-vehicle sales at or above current levels (i.e., more than 11 million units). We also believe Ford has good prospects for generating cash flow from its automotive operations after separation payments in 2010 and 2011, as the key U.S. auto market gradually recovers. We believe Ford is making progress in stabilizing, and perhaps improving, its U.S. market share.

Still, we believe underlying business risks remain high, most notably:

Exposure to a potentially weak recovery in vehicle demand in key global markets, particularly very competitive conditions in Europe;

Still-high dependence on light trucks for profitability in North America, despite Ford's recent emphasis on new car introductions; and

Substantial execution risk of its ongoing repositioning and expansion.

We expect Ford's financial results to remain highly sensitive to future industry sales and product mix, actions by competitors, and other factors such as higher raw material costs or fuel prices that are beyond its direct control.

Our economists forecast U.S. light-vehicle sales of about 11.5 million units in 2010, 11% higher than 2009 levels. We currently expect sales to rise to 13.1 million units in 2011, but even with this improvement, sales would still be just about at the levels of 2008 that we considered weak.

Our outlook for the major auto markets in Europe, Ford's second-largest market, is less positive than for the U.S. market. We expect sales in Europe to be about 10% lower in 2010 than in 2009, in part because of the shifting of sales caused by various government scrappage incentives in 2009. Ford and other high-volume automakers in Europe benefited from these incentive plans, but we believe the boost to sales is over-–although several automakers are replacing the government-sponsored incentives with higher incentives of their own. We believe profit margins (4.3% in the second quarter) in Europe will be under pressure for the rest of the year and for at least the early part of 2011 primarily because of the tough competition.

We view Ford's ongoing focus on debt reduction as a positive credit factor. However, the company has also issued debt to the United Auto Workers' health care trust and is borrowing funds from the U.S. Department of Energy to bolster capital investment. Still, we believe the company's performance and these actions, taken together, have further reduced the risk that Ford's liquidity could fall to dangerously low levels in the next few years.

Ford Credit's results continue to be aided, in our view, by the industrywide strength in used-vehicle prices, which leads to lower costs related to lease residuals and reduced credit losses as consumer credit quality stabilizes at many financial institutions. We believe residual values will remain volatile and a risk to Ford Credit's future results.

We view Ford's liquidity as adequate under our criteria. We expect liquidity in Ford's automotive operations to remain substantial, as we assume the company will stop using cash from automotive operations in 2010. But our liquidity assessment also takes into account the automotive businesses' potentially substantial use of cash from working capital during periods of production declines, as well as Ford Credit's high ongoing funding requirements.

Ford announced today that it completed its sale of Volvo Car Corp., although under the terms of Ford's credit agreement, half of the net cash proceeds must be used to repay secured debt. We do not expect Ford to sell a stake in Ford Credit.

The outlook is positive. We could raise the rating in the next year if, among other things, the gradual improvement in light-vehicle sales continues in most global markets and Ford's prospects for generating free cash flow and profits in its automotive manufacturing business continue to solidify. For example, we could consider raising Ford's rating if we believed its global cash generation from automotive operations next year would be at least $4 billion (roughly equivalent to 15% of current unadjusted automotive debt). Other positive rating considerations would be if Ford can sustain its pretax automotive profit margin in North America in the upper–single-digit percentage area and further demonstrate an ability to cope successfully with the evolving competitive structure of the global auto industry, including remaining profitable in Europe.

We could revise the outlook to stable if adverse competitive developments (for example, overproduction, excess inventory, increased incentives, or unfavorable shifts in customer demand) reduced the prospects for profitable and cash-positive results in 2010 or 2011, or if the company were to use a substantial amount of cash in its automotive operations in any quarter.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100802/OEM/308029873/1424#ixzz0vUSNNI9w

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Rating upgrade lifts Ford stock

Assessment by S&P, Volvo sale send shares up more than 3%

Christine Tierney / The Detroit News

Shares in Ford Motor Co. rose more than 3 percent on Monday, bolstered by an upgrade in the carmaker's debt rating from Standard & Poor's Ratings Services.

S&P raised its credit rating on Ford and Ford Motor Credit by two notches, to B+ from B-, citing the Dearborn automaker's strong second-quarter results and cash flow.

S&P announced the move just as Ford completed the sale of Volvo Cars to Zhejiang Geely Holding Co., netting $1.5 billion -- with possibly more coming after Ford and Geely review Volvo's accounts and make adjustments to the payment.

Ford's new rating is still four notches below investment grade in New York-based S&P's scale, but the agency said the outlook for Ford was positive.

"The upgrade reflects our reassessment of Ford's business risk profile to weak from vulnerable, and its financial risk profile to aggressive from highly leveraged," said S&P credit analyst Robert Schulz.

He said there was a one-in-three chance that the rating agency would raise Ford's rating again in the next 12 months.

Ford's stock finished Monday up 39 cents, or 3.05 percent, at $13.16, outperforming a rising stock market.

Last week, Ford reported earnings of $2.6 billion on higher car and truck sales for the second quarter. The automaker also said it repaid $7 billion of the debt that it took on in 2006 to ride out the industry downturn.

"We believe the company's automotive operations in North America will remain profitable with industry light-vehicle sales at or above current levels," S&P said in a statement.

"We also believe Ford has good prospects for generating cash flow from its automotive operations ... making progress in stabilizing, and perhaps improving its U.S. market share."

The ratings agency cited Ford's emphasis on debt-reduction as a positive factor, but said it remains concerned about the impact of slow sales growth in the United States and Europe, Ford's biggest markets.

S&P noted that, under the terms of Ford's credit agreement, half of the net cash proceeds from the Volvo sale must be used to repay secured debt.

From The Detroit News: http://www.detnews.com/article/20100803/AUTO01/8030329/1148/auto01/Rating-upgrade-lifts-Ford-stock#ixzz0vXv5ZTGh

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