DBRS Morningstar Changes Trend on Ford Motor Company to Stable from Negative, Confirms at BB (high)

DBRS Limited (DBRS Morningstar) changed the trend on Ford Motor Company’s (Ford or the Company) Issuer Rating to Stable from Negative and confirmed the rating at BB (high). Pursuant to the “DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers,” DBRS Morningstar also changed the trends to Stable from Negative for the instrument ratings on Ford’s Long-Term Debt, Revolving Credit Facility, and Senior Unsecured Convertible Debt and confirmed the ratings at BB (high) with associated recovery ratings of RR4. Concurrently, DBRS Morningstar changed the trends on the long-term debt ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary Ford Credit Canada Company to Stable from Negative. The trends on the short-term ratings remain at Stable as, pursuant to DBRS Morningstar’s debt rating scale, the R-4 rating maps consistently to long-term ratings ranging from BB (high) to B (high). DBRS Morningstar also confirmed the long-term and short-term ratings at BB (high) and R-4, respectively, of Ford Credit and Ford Credit Canada Company.

The rating actions reflect Ford’s sound business risk assessment as a major global automotive original equipment manufacturer (OEM) with a notably strong competitive position in full-size pickup trucks. Additionally, the Company’s financial risk assessment (FRA) has stabilized somewhat (although remaining meaningfully weaker relative to recent historical levels) following last year’s challenges substantially attributable to the Coronavirus Disease (COVID-19); however, DBRS Morningstar notes that Ford’s ensuing recovery has been undermined by the global semiconductor shortage that has afflicted substantially all automotive OEMs.

As with several OEMs, the Company’s 2020 operating performance was significantly weaker year over year (YOY), in line with the global progression of the coronavirus pandemic that adversely affected both production and demand. Accordingly, Ford’s 2020 wholesale volumes declined by 22% YOY to 4.2 million units from 5.4 million units in 2019. Notwithstanding the sizable drop in volumes, Ford proved reasonably resilient to the pandemic with the Company benefitting from cost reductions and notable pricing gains that were significantly a function of low industry inventories stemming from production interruptions caused by the coronavirus pandemic. DBRS Morningstar notes further that Ford’s liquidity remained solid throughout the pandemic given proactive measures taken by the Company that included suspending dividends (after Q1 2020), fully drawing down available loan facilities for a total amount of $15.4 billion, and issuing unsecured notes in an aggregate amount of $8.0 billion. As a function of a meaningful recovery in H2 2020 that exceeded DBRS Morningstar’s expectations, Ford generated significant cash (which included materially positive working capital effects) in the latter half of the year that enabled it to fully repay its revolving facilities in Q3 2020.

Going forward, the anticipated industry recovery following last year’s marked contraction stands to be impeded by the global semiconductor shortage that could now extend into 2022. The Company has indicated that it is expecting associated production interruptions to result in losses of about 50% of planned Q2 2021 production and annual losses of about 1.1 million wholesale units, equivalent to roughly 20% of 2019 volumes. This translates to an estimated earnings impact of $2.5 billion, with increasing commodity costs representing another headwind. Despite the above, Ford’s 2021 industrial earnings are forecast to moderately improve YOY, in line with projected volume gains. These earnings should be bolstered considerably by ongoing firmer pricing that reflects the above-cited low industry inventory levels as well as Ford’s product momentum, with recent launches including several high-profile models such as the Mustang Mach-E, Bronco, and F-150. DBRS Morningstar notes that Ford has now effectively completed its targeted migration away from passenger cars that typically generated weak contribution margins, with the Company’s product portfolio now substantially consisting of more profitable trucks and utility vehicles. Finally, earnings of Ford Credit are estimated to improve considerably from already solid 2020 levels in line with lower credit loss provisions and favourable residual value performance, with distributions from Ford Credit to the Company’s industrial operations to increase correspondingly.

Consistent with the Stable trend assigned to the ratings, DBRS Morningstar deems it unlikely that Ford will be subject to negative rating actions over the near to medium term because the Company has endured the worst of the coronavirus pandemic; Ford’s FRA is underpinned by its consistently solid liquidity position; and the industrial operations have a net cash position of $5.4 billion as of March 31, 2021. Conversely, positive rating actions could result if the Company’s earnings performance continue to improve next year amid more favourable industry conditions (and the moderation of the semiconductor shortage), bolstered by Ford’s aforementioned product momentum—thereby enabling a reduction in industrial indebtedness and associated improvement in credit metrics.

ESG CONSIDERATIONS
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/373262.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020; https://www.dbrsmorningstar.com/research/368670), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/366063), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

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

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:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020) was used to evaluate the ratings of Ford while DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) was applied to subsequently determine the ratings of Ford Motor Credit Company LLC and Ford Credit Canada Company, respectively. Finally, DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020) was applied to estimate the recovery prospects of Ford’s various security lines and assign specific instrument ratings thereto.

The last rating action on this transaction took place on March 19, 2021, when DBRS Morningstar assigned a rating of BB (high) with a Negative trend to Ford’s Senior Unsecured Convertible Notes issuance.

Generally, 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: October 9, 1997

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020)
https://www.dbrsmorningstar.com/research/368670/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021)
https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020)
https://www.dbrsmorningstar.com/research/366063/dbrs-morningstar-criteria-recovery-ratings-for-non-investment-grade-corporate-issuers