Fitch Ratings upgraded Ford Motor Co. to “investment grade” on Tuesday, a key step that could lower borrowing costs and that brings the second-largest U.S. auto maker closer to reclaiming its Blue Oval trademark.
Ford mortgaged the famous logo and most of its other assets six years ago in order to borrow money and pay for its turnaround plan.
The upgrade is a reflection of Ford’s steps to shore up its balance sheet since its near-collapse in 2006, Fitch said. Since then, Ford lowered its break-even point, improved its vehicle lineup and reduced its pension obligations.
“Fitch believes that the work that has been accomplished has put the company in a solid position to withstand the significant cyclical and secular pressures faced by the global auto industry,” the ratings agency said in a release.
Still, Ford also faces the risk of slower-than-expected global demand for vehicles, particularly in Europe, and a relatively weak position in Asia, Fitch said.
Fitch is the first of the three major ratings agencies to upgrade Ford to investment grade, ending a seven-year period in which Ford debt was rated as “junk.” Fitch upgraded Ford and its captive finance arm, Ford Credit, to “BBB-” from “BB+.” Its outlook on both is “stable.”
Since the fall of 2006, chief executive Alan Mulally’s “One Ford” strategy has been the centrepiece of the automaker’s revival. The plan centres on unifying Ford’s once-disconnected business units and taking advantage of its scale to drive down costs and build a global brand.
In late 2006, Ford borrowed more than $23-billion (U.S.) to pay for the turnaround plan, secured by most of its assets.
The Blue Oval logo and factories were among the assets that Ford used to secure those loans. Should one more ratings agency upgrade Ford to investment grade, the collateral underpinning those loans will be released.
The return of the insignia, which is stamped on the grills of Ford’s cars and trucks, would be a symbol of how far the company has come since its financial crisis six years ago. The Blue Oval logo has been in use for decades.
A higher rating would also help Ford lower its borrowing costs, helping the core automotive operation and Ford Credit.
Ford chief financial officer Bob Shanks called the Fitch upgrade an “important proof point” validating the company’s business plan.
“Our One Ford plan includes achieving strong investment grade ratings and maintaining ‘investment grade’ throughout an economic cycle,” Mr. Shanks said in a statement.
Ford was the only U.S. auto maker not to accept a bailout from the U.S. government during the 2008-2009 financial crisis. Ford shares were up 0.8 per cent at $11.44 on Tuesday afternoon.
The last time Ford was rated as investment grade by all three major ratings agencies was in May 2005.
The other two major ratings agencies, Moody’s Corp’s Moody’s Investors Service and McGraw-Hill Cos Inc,’s Standard and Poor’s Ratings Service, each rate Ford a single notch below “investment grade.”
Once all three agencies give Ford “investment grade” rating, Ford Credit, the auto financing arm of Ford, will be able to get lower borrowing rates that it could pass on to consumers, said Morningstar analyst David Whiston.
“It will allow Ford to sell more cars,” said Mr. Whiston, whose agency had already rated Ford investment grade.
In keeping with standard practice in the industry, Ford Credit lends money to consumers and dealers, often at a lower interest rate than it can obtain for itself. These rates can be as low as zero per cent and help boost vehicle sales. The upgrade by Fitch can lower the cost of maintaining this strategy.
Since the downturn, Ford has invested more heavily in cars, such as its Focus compact car and Fusion mid-size sedan, to satisfy consumers’ growing demand for fuel-efficient vehicles.
The new Focus car can better compete against rivals including Honda Motor Co. Ltd ’s Civic and Toyota Motor Corp. ’s Corolla, Fitch said.
“Ford’s more balanced product portfolio has put it in a better position to weather the likely mix shifts to smaller vehicles typically seen in economic downturns,” Fitch said.
Ford would still burn a “substantial” amount of cash in a downturn, Fitch said, but Ford’s stockpile of cash and access to liquidity would help the auto maker withstand its cash burn. Ford ended 2011 with a net cash position of nearly $10-billion.
But recessionary conditions in Western Europe and a slowdown in growth in China and India pose a potential problem for Ford, Fitch said. High energy prices, high unemployment and a weak housing market present a risk to U.S. auto demand.
The auto maker is expected to report first-quarter earnings on Friday.
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