DBRS Confirms Ford Motor Company at BBB, Trend Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and long-term debt ratings of Ford Motor Company (Ford or the Company) at BBB. Concurrently, DBRS confirmed the short- and long-term debt ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary Ford Credit Canada Company at R-2 (middle) and BBB, respectively, as well as assigned a Long-Term Issuer Rating of BBB to Ford Credit. The confirmations reflect Ford’s sound business risk assessment as a major global automotive original equipment manufacturer with a notably strong competitive position in full-size pickup trucks. Moreover, notwithstanding some softening in the Company’s recent earnings performance, Ford’s financial risk assessment remains wholly commensurate with the currently assigned ratings.

The Company’s 2017 earnings were sound, albeit materially weaker year over year (YOY), largely due to higher commodity costs (notably, steel and, to a lesser degree, aluminum) and adverse foreign exchange (FX) developments. Moreover, Ford did not meaningfully offset such factors through attained efficiencies/cost reductions. As a result, the Company’s margins have softened, notably in its core North American market (which continues to effectively dominate its automotive performance), where Ford’s recent profitability has lagged vis-à-vis its closest peers. In international markets, the Company’s 2017 pre-tax earnings were also weaker YOY and, in aggregate, essentially at break-even levels (on an adjusted EBIT basis). The two geographic segments declining relative to 2016 were Europe (attributable to Brexit effects, including lower industry volumes and negative FX impacts) and Asia Pacific (notably China, where profit was weaker in line with lower volumes and softer pricing that partly reflected Ford’s somewhat aged regional product line).

Acknowledging the weaker financial performance, the Company has announced plans to redesign business processes aimed at (among other items) increasing simplicity, customer centricity and cost reductions/efficiencies, collectively referred to by Ford as its “fitness.” The Company suggests that improved fitness would render Ford better able to withstand commodity/FX and other headwinds going forward while effectively increasing its ability to make additional investments in alternative powertrain development and new mobility business initiatives. DBRS notes that earnings prospects of such new businesses remain modest over the near term, with associated investments/costs progressively increasing. For the time being, however, DBRS further observes that these investments remain readily absorbed by Ford’s solid financial profile, with the automotive operations as of December 31, 2017, having a net cash position of $10.6 billion.

The Stable trends on the ratings incorporate DBRS’s expectation that Ford’s financial performance, despite some continuing earnings moderation in the forthcoming year given ongoing commodity & FX headwinds, is likely to persist at sound levels amid industry conditions that in aggregate remain rather reasonable (notwithstanding uncertainties associated with potential trade policy changes, notably in North America and Europe). However, materially weaker earnings, exacerbated by investments in new mobility business initiatives, could potentially pressure the ratings. Conversely, higher profitability (bolstered by stronger fitness levels) amid improving geographic earnings diversification could result in positive rating implications.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.