Ford Loses Investment Grade Status: What It Means

Ford Motor Company (NYSE: F) lost its investment grade status. Standard & Poor’s downgraded Ford’s credit rating to BB +, a notch below the investment rating, fearing that the shutdown of its North American factories could affect Ford’s margins and cash flow for a period of time. prolonged.

Ford’s return to investment grade status in 2012, following the 2008-2009 economic crisis, was a hard-won goal for the company. It was rightly celebrated at the time. But with this downgrade, 2 of the top 3 rating agencies are now rating Ford below the BBB level, which means the company’s credit rating is now, technically speaking, undesirable.

Here’s what we know and what it could mean.

Image source: Ford Motor Company.

What S&P Said About Ford’s Credit Rating

In a brief note released after markets closed on Wednesday, S&P said the coronavirus pandemic added to its existing concerns about Ford.

The decision to downgrade Ford Motor Co.’s investment grade to speculative grade reflects that the company’s credit metrics and competitive position have become on the edge of the investment grade prior to the coronavirus outbreak, and the expected slowdown in demand for light vehicles made it unlikely that Ford would maintain the required measures.

S&P said the current rating has “negative implications,” meaning there is at least a 50% chance that it could lower Ford’s rating even further in the near future. S&P analysts are waiting to see how long Ford’s factories will be closed and how much demand for light vehicles will be impacted once they restart.

A Quick Introduction to Business Credit Ratings

There are three major agencies that rate business credit: S&P, Moody’s Investors Service and Fitch Ratings. If two of a company’s three credit rates are below the BBB (or equivalent) level, the company’s debt is considered “speculative” rather than “”investment quality. “

The implications are simple: the lower a business’s credit rating, the more it will have to pay (in interest) to borrow money.

“Junk bond” is the Wall Street slang term for bonds with a speculative credit rating. It is most often used to refer to debt issued by companies with a very low credit rating (in the Cs rather than the Bs), but it can be applied to anything in the “speculative” range. “.

S & P’s move follows Ford’s downgrade by Moody’s and Fitch

S&P isn’t the first to downgrade Ford – in fact, it’s the third.

Fitch reviews downgraded Ford to BBB-, the lowest level that is still considered an investment rating, in a note on Tuesday, March 24 that reflected analyst concerns about what could happen. after the pandemic subsides:

Fitch currently believes the company has the financial flexibility to handle an extended shutdown of its facilities, but concerns are growing that a combination of an extended shutdown followed by weak demand in an environment of global recession could put additional pressure on the company’s credit profile.

Like S&P, Fitch has warned it could lower Ford’s rating even further, depending on how things develop over the next few months.

Moody’s, meanwhile, cut Ford’s credit rating at speculative levels last fall. In a memo released Sept. 9, Moody’s said it was concerned that CEO Jim Hackett’s major restructuring of the company (what Ford calls a “redesign”) would likely cost billions of dollars, just as the global new car market seemed to be softening.

Remember, it was in September 2019:

[T]Ford’s performance erosion occurred during a period when global automotive conditions have been fairly healthy. Ford now faces the challenge of solving these operational issues as demand in key markets weakens and the auto industry faces an unprecedented rate of change in vehicle electrification, autonomous driving, carpooling and increasingly heavy emissions regulations.

One of Moody’s concerns at the time was that the economic waters might become more choppy before the Ford redesign was completed. I think you can say they were right.

What does this mean for Ford investors?

I know this is a disappointment for the management and employees of Ford. But for auto investors, I’m not sure it matters a lot right now. It’s not much of a surprise to hear right now that Ford (and every other automaker outside of China) is going to struggle until the coronavirus pandemic subsides – and depending on the state savings in North America and Europe when it does, maybe for a long time afterwards.

This development means that Ford will have to pay more to borrow money, whether through lines of credit or debt issuance. But for now, it seems like a small drop in a very big bucket: The steps Ford takes in the days and weeks to come to cut costs and restart its factories will mean a lot more to investors over the years. next time.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Dora Kohler

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