DETROIT — Ford Motor saw its credit rating downgraded to “junk” status by Moody’s Investors Service late Monday.
The impact of the action, which occurred after the stock market closed, could increase the cost of borrowing money because the automaker is considered a higher credit risk — sort of like a higher interest rate on a car loan for someone with a low credit score.
“Ford remains very confident in our plan and progress,” the carmaker said in a statement. “Our underlying business is strong, our balance sheet is solid and we have plenty of liquidity to invest in our compelling strategy for the future. As Moody’s notes, we are already addressing two of its primary concerns: operating inefficiency and our China business. The agency also calls out our ‘sound’ balance sheet and liquidity position, and expects our global redesign and new products to contribute to improvement in earnings, margins and cash generation.”
Moody’s said the downgrade reflects the company’s anemic global business position and “considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan.”
However, the outlook is “stable,” the debt ratings agency said, noting that its $23 billion in cash exceeds its debt.
Ford has undergone an $11 billion restructuring, and a cash cost of about $7 billion, Moody’s wrote. “Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers.”
Cash flow and profit margins are likely to remain weak and Ford faces such difficulties at a time auto markets are softening, Moody’s said. Ford “does have a sound balance sheet and liquidity position from which to operate,” Moody’s said.
It added, “The alliance with Volkswagen AG will provide important long-term benefits to Ford’s position in electric vehicles, autonomous vehicles and commercial vehicles. Nonetheless, Moody’s anticipates only minimal impact on Ford’s earnings and cash generation before 2022.”
Shares of Ford fell after ending the regular trading day up 2.1% at $9.54.
Industry analyst Jon Gabrielsen said the rating is a considerable concern for companies because, as the auto industry goes into a downturn, carmakers like Ford generally need to do considerable borrowing.
“Moody’s rating agency is everything,” he said. “Anytime major investors see a downgrade to junk status, which shows a higher risk, it tends to cause the stock price to go down.”
Moody’s wrote: “The erosion in Ford’s performance has occurred during a period in which global automotive conditions have been fairly healthy.”
Moody’s cited Ford’s “operating inefficiencies” in “almost all” of Ford’s key markets. “An upgrade of Ford during the near term is unlikely.”
David Kudla, CEO and chief investment strategist with Mainstay Capital Management, is a Grand Blanc investment adviser who manages $2.5 billion in assets for clients who include many Ford employees.
He said the downgrade on Monday is “unfortunate for Ford” because things are only getting tougher in the auto industry. Junk status means fewer pension funds and other institutional investment funds will be able to buy Ford bonds.
“Even though you have cash, you are going out and securing debt from time to time, and it’s costlier to do that when that line in the sand is crossed from investment grade to junk,” Kudla said. “We’re in an environment where we think the economy is looking toward harder times, not better times.”
While both Ford and General Motors are stocking up on cash for an expected downturn, he said, securing debt is still necessary for big capital projects.