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Ford Motor Co. Moves Closer to Investment Grade Rating

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Moody’s recent upgrade of Ford Motor Co.’s credit to Ba1 from Ba2 marks a significant step towards the company’s return to investment grade. This upgrade places Ford at the highest level of speculative-grade status.

Moody’s decision to upgrade Ford’s credit is based on the expectation that the company will experience a notable improvement in its automotive earnings before interest, taxes, and depreciation (EBITDA) margin and automotive cash flow. According to the rating agency, this improvement is primarily driven by meaningful advancements in Ford’s Ford Blue and Ford Pro segments. Despite ongoing losses in Ford’s electric vehicle segment, Model e, the company’s higher EBITDA margin will enable it to generate sustained positive free cash flow.

However, Moody’s does caution that there remains a significant execution risk associated with Ford’s electric vehicle transition.

Ford has been actively pursuing the electrification of its fleet for several years now. By the end of this year, the company aims to achieve an annual production pace of 600,000 electric vehicles, with plans to ramp up production to 2 million by the end of 2026. Additionally, Ford has committed to making electric vehicles account for half of its global mix by 2030.

As with any automaker, there are key risks that Ford must navigate. These risks include potential loss of market share, challenges in earning adequate profits and returns on electric vehicles, as well as constraints in the supply of critical materials for manufacturing.

In 2020, Ford’s credit rating was downgraded to speculative-grade, or “junk,” status due to concerns surrounding the impact of factory shutdowns related to the COVID-19 pandemic on the company’s margins and cash flow.

It is worth noting that Ford had previously achieved investment grade status in 2012 after enduring the challenges brought about by the 2008 financial crisis.

A return to investment grade would not only bolster Ford’s financial standing but also increase demand for its bonds, as evidenced by the recent net buying activity. Additionally, a higher credit rating would make borrowing costs more affordable for the company.

Related: Ford to announce new agreements for EV battery raw materials at capital markets day, affirms 2023 EBIT outlook

Ford’s Recent Bond Activity

According to BondCliQ Media Solutions, Ford’s most active bonds over the past 10 days have experienced a significant increase in net buying. One particularly notable bond, the 3.25% notes maturing in 2032, has seen a remarkable $202 million of net buying during this period. The chart provided visually represents the total volume for each of these bonds.

Moody’s Positive Outlook

Moody’s, a reputable financial agency, has expressed optimism regarding Ford’s recent success in implementing a turnaround plan and benefiting from favorable industry conditions. These factors have allowed Ford to adapt to the high costs associated with the transition to electric vehicles without causing a significant impact on its earnings.

The agency highlights Ford’s reduced reliance on dividends from Ford Motor Credit Company LLC (Ford Credit) as a major positive. Even with an anticipated increase in capital spending due to the company’s commitment to electric vehicles in the coming years, Ford has demonstrated its ability to fund capital expenditures without depending on Ford Credit.

Additionally, Moody’s acknowledges Ford’s strong liquidity and conservative leverage, which will prove beneficial in weathering potential strikes at its factories during upcoming labor contract negotiations.

Robust Financial Position

As of March 31, Ford had an impressive cash and marketable securities balance of $28.6 billion. Furthermore, the company has $17.6 billion accessible through committed credit facilities. Additionally, Ford faces only limited debt maturities until 2025. It is also projected to generate free cash flow of $1.4 billion this year, excluding dividends.

Future Rating Upgrades

Moody’s suggests that Ford’s ratings could see further improvements if the company manages to maintain its automotive EBITA (earnings before interest, taxes, and amortization) margin above 5%. Moreover, demonstrating its ability to finance capital expenditures and dividends through cash flow generated by its automotive business will be a significant factor. Lastly, achieving commercial success and displaying positive profitability trends for its battery electric vehicles would also contribute to a potential rating upgrade.

Strong Stock Performance

Ford’s stock has outperformed the broader market, showing a notable 29% gain year-to-date compared to the S&P 500’s 17% increase.

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