DBRS Limited (DBRS Morningstar) upgraded Ford Motor Company’s (Ford or the Company) Issuer Rating to BBB (low) from BB (high). DBRS Morningstar also upgraded the ratings on Ford’s Long-Term Debt, Revolving Credit Facility, and Senior Unsecured Convertible Debt to BBB (low) from BB (high). Concurrently, DBRS Morningstar upgraded Ford Motor Credit Company LLC’s (Ford Motor Credit) Long-Term Debt rating and Long-Term Issuer Rating to BBB (low) from BB (high) as well as its Short-Term Debt rating to R-2 (low) from R-4. DBRS Morningstar also upgraded the Long-Term Debt and Short-Term Debt ratings on Ford Motor Credit’s subsidiary, Ford Credit Canada Company, to BBB (low) and R-2 (low) from BB (high) and R-4, respectively. The trends on all ratings changed to Stable from Positive.
DBRS Morningstar had previously indicated in its press release dated May 17, 2022, that a ratings upgrade would likely occur if Ford kept ongoing operating performance essentially consistent with its then prevailing earnings. While the Company’s earnings momentum has been somewhat undermined by ongoing cost headwinds and supply chain issues, DBRS Morningstar nonetheless notes that Ford’s 2022 annual industrial (i.e., excluding Ford Motor Credit) operating income (as calculated by DBRS Morningstar) improved significantly year over year (YOY) to $4.8 billion from $1.4 billion in 2021. The improved earnings were substantially a function of strong pricing gains, higher volumes, and consistent product mix, with Ford (as with its automotive peers) benefitting from significant pent-up demand given protracted interruptions in automotive production/supply; this notwithstanding, cost increases (notably in the form of higher commodity, material/freight, and structural costs) represented a significant offset. In Q1 2023, amid underlying factors broadly consistent with those outlined for 2022, Ford’s industrial earnings continued to climb (improving significantly relative to Q1 2022). For 2023, Ford has targeted its consolidated operating performance to approximate prior year levels, although this significantly reflects the normalization of Ford Motor Credit’s earnings from peak levels. Regarding its industrial operations, the Company projects profitability to increase further YOY, with Ford’s legacy internal combustion engine (ICE) automotive business and growth in Ford Pro more than offsetting higher losses of its electric vehicle (EV) segment. Overall, DBRS Morningstar deems Ford’s 2023 forecast quite attainable.
DBRS Morningstar notes the Company’s financial profile has improved in line with its elevated earnings. Moreover, associated credit metrics have strengthened further given Ford’s recent reductions in industrial indebtedness, which notably included net debt repurchases of approximately $2.8 billion in 2021. In line with the above, the Company’s financial risk assessment (FRA) has improved to levels that afford some cushion even within the upgraded ratings (Ford’s industrial operations have a sizable net cash position).
Ford still has meaningful challenges ahead, with the Company facing sizable investments and higher product development costs to decarbonize its product portfolio. However, DBRS Morningstar believes these challenges will be reasonably offset by Ford’s solid financial profile and liquidity position that continues to benefit from strong earnings/cash flow generation of its legacy ICE vehicle business.
Consistent with the Stable trends, DBRS Morningstar expects the Company’s ratings to remain constant over the near to medium term, with further positive actions somewhat unlikely given the sizable cost and investment requirements facing Ford given its growth and electrification objectives. Conversely, significantly weaker earnings amid such investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, although DBRS Morningstar deems such a scenario rather unlikely given the aforementioned cushion of the Company’s FRA even within the newly upgraded ratings.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor, as Ford’s products are subject to a wide range of regulatory scrutiny relating to (among other factors) greenhouse gas emissions and fuel efficiency. The Company has been actively working toward its plan to achieve carbon neutrality across its vehicle fleet, facilities, and suppliers by 2050. In addition, Ford plans to source 100% carbon-free electricity for its global manufacturing efforts by 2035. Ford is also in the process of working toward delivering North America’s largest public EV charging network, with the Company targeting an annual production capacity of 2 million EVs by the end of 2026.
Although the Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends on Ford’s ratings.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on this transaction took place on May 17, 2022, when DBRS Morningstar changed the trends on Ford to Positive from Stable, while confirming the ratings at BB (high).
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Managing Director, Global Head of Diversified Industries
Initial Rating Date: October 9, 1997
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