DBRS Limited (DBRS Morningstar) downgraded Ford Motor Company’s (Ford or the Company) Issuer Rating to BB (high) from BBB. Additionally, pursuant to its “DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers” (August 22, 2019), DBRS Morningstar also downgraded the instrument ratings on Ford’s Long-Term Debt and Revolving Credit Facility to BB (high) with a recovery rating of RR4. Concurrently, DBRS Morningstar downgraded Ford Motor Credit Company LLC’s (Ford Motor Credit) Long-Term Debt rating and Long-Term Issuer Rating to BB (high) from BBB as well as its Short-Term Debt rating to R-4 from R-2 (middle). DBRS Morningstar also downgraded the Long-Term Debt and Short-Term Debt ratings on Ford Motor Credit’s subsidiary, Ford Credit Canada Company, to BB (high) and R-4 from BBB and R-2 (middle), respectively. The trend on all long-term ratings is Negative while the trend on all short-term ratings is Stable as, pursuant to DBRS Morningstar’s debt rating scales, the R-4 rating maps consistently to long-term ratings ranging from BB (high) to B (high). With these rating actions, DBRS Morningstar removed all ratings from Under Review with Negative Implications, where they were placed on March 27, 2020.
The rating downgrades reflect prior headwinds, including the Company’s ongoing restructuring activities amid lacklustre automotive conditions that the global Coronavirus Disease (COVID-19) outbreak has considerably exacerbated. DBRS Morningstar notes that, pursuant to the moderate scenario outlined in its commentary, “Global Macroeconomic Scenarios: Application to Credit Ratings” dated April 22, 2020, Ford’s financial risk assessment and associated credit metrics are projected to decline to meaningfully weaker levels than those that supported the Company’s previous ratings.
As with several automotive original equipment manufacturers, the initial coronavirus outbreak in January 2020 primarily affected Ford in China, where imposed restrictions (including social distancing, self-isolation, and quarantines) effectively disrupted demand, with the Company’s supply base also subject to interruption. However, in mid-March 2020, the global spread of the coronavirus increased substantially when Ford’s industrial activities in North America, Europe, and South America (as well as in several smaller jurisdictions) were shut down rapidly. As a result, Ford’s Q1 2020 earnings were correspondingly weak. The Company incurred an adjusted-EBIT loss of $600 million and Ford indicated that the coronavirus negatively affected EBIT by at least $2 billion. Moreover, Ford’s recent use of cash has been sizable as negative working capital effects (primarily consisting of ongoing payments to suppliers notwithstanding the stoppage of production) exacerbated the initial cash burn. The Company expects its rate of cash burn to moderate significantly following the effective runoff of such payables.
Consistent with its industrial peers, Ford has implemented several countermeasures in response to the coronavirus, including, among others, reductions in operating expenses, salary cutbacks, short-term layoffs, and decreases in capital expenditures. The Company began a progressive restart of its European operations in early May 2020 with North America following on May 18, 2020; however, it remains to be seen how successful this resumed production will be, given concerns regarding the resiliency of the supply base as well as demand levels over the immediate term.
DBRS Morningstar notes that Ford has taken a number of meaningful and proactive actions to bolster its cash position in response to the coronavirus outbreak, which include suspending dividend payments (amounting to $2.4 billion annually in recent years), drawing down available loan facilities for a total amount of $15.4 billion, and issuing unsecured notes in an aggregate amount of $8.0 billion. As a result of these measures, Ford’s liquidity as of April 24, 2020, totalled approximately $35 billion. Accordingly, despite the decline in earnings and sizable cash burn related to the coronavirus, DBRS Morningstar deems Ford’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.
Consistent with the Negative trend on the long-term ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of the coronavirus, DBRS Morningstar notes that if the pandemic progresses such that it approximates the adverse scenario outlined in the above-cited commentary, this could result in additional downward rating pressures. Conversely, if the coronavirus is sufficiently contained in H1 2020 and a meaningful recovery follows in the remainder of the year, DBRS Morningstar could change the trend on the long-term ratings to Stable.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 22, 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019) was used to evaluate the ratings of Ford while DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020) was applied to subsequently determine the ratings of Ford Motor Credit Company LLC and Ford Credit Canada Company, respectively. Subsequently, DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 22, 2019) was applied to estimate the recovery prospects of Ford’s various security lines and assign specific instrument ratings thereto. Finally, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019) was applied to assess the corporate structure of the Ford group of companies.
The Revolving Credit Facility and Long-Term Debt ratings of Ford have been disclosed to the Company and the ratings were amended following such disclosure before being issued.
The last rating action on this transaction took place on March 27, 2020, when DBRS Morningstar placed Ford’s, Ford Motor Credit Company LLC’s, and Ford Credit Canada Company’s ratings Under Review with Negative Implications.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s trends and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: October 9, 1997
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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019)
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020)
-- DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 22, 2019)
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019)