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Fitch Rates Ford's Proposed Convertible Notes 'BB+'/'RR4'

· 03/16/2021 09:58
Fitch Rates Ford's Proposed Convertible Notes 'BB+'/'RR4'

(The following statement was released by the rating agency)

Fitch Ratings-Chicago-16 March 2021:

Fitch Ratings has assigned a rating of 'BB+'/'RR4' to Ford Motor Company's (Ford) proposed issuance of senior unsecured convertible notes due 2026. Proceeds from the $2.0 billion of notes (plus an additional $300 million over-allotment option) will be used for general corporate purposes, including the potential repayment of debt.

Ford's Long-Term Issuer Default Rating (IDR) is 'BB+', and its Rating Outlook is Negative.


Key Rating Drivers

Proposed Notes: Fitch expects the issuance of the proposed convertible notes to provide Ford with incremental liquidity in the near term, while potentially providing the company with an option to repay higher cost debt over the longer term. With the convertible option, Fitch expects cash interest costs on the proposed notes to be meaningfully lower than most of Ford's other senior unsecured debt, especially the notes that the company issued in 2020.

Rating Rationale Overview: Ford's ratings incorporate both the lingering effects of the coronavirus pandemic on the company's credit profile, as well as issues that predated the pandemic. Pre-pandemic concerns included an elevated cost structure that resulted in lower margins than most of the company's global peers and relatively weak FCF generation, even after excluding cash costs associated with the company's global redesign activities. The ratings also consider the substantial investments that Ford is making to electrify its global vehicle fleet, ongoing investments in automated vehicle technology and risks associated with the global redesign activities.

The Negative Outlook largely considers the uneven recovery expected in the global auto market in the near term, including the effects of the semiconductor shortage, as well as ongoing concerns about the coronavirus pandemic. Fitch could consider revising the Rating Outlook to Stable if it becomes clearer that a combination of an improving macro backdrop and Ford's own profit improvement initiatives will make a further downgrade in the ratings unlikely.

FCF Pressure to Lessen: Fitch expects Ford's automotive FCF to remain under pressure over the next couple of years as the company continues to work through its global restructuring, with outflows potentially peaking in 2021 as the company exits manufacturing in Brazil. Excluding the redesign initiatives, Fitch expects FCF will improve on a more benign market backdrop, although the semiconductor shortage is a concern. Offsetting some of the baseline improvement will be higher investments in electrification and autonomous vehicles.

Actual FCF in 2020, according to Fitch's calculations, was ($248) million, or positive $255 million when excluding $503 million in cash costs for the redesign. The FCF margin was -0.2%, or 0.2% when excluding the redesign costs. FCF in 2020 was supported by lower-than-expected capex and a much better-than-expected working capital performance for the full year.

Leverage to Remain Elevated: Fitch expects Ford's leverage to remain elevated compared with pre-pandemic levels, largely due to $8.0 billion in senior unsecured notes that the company issued in 2020. On a positive note, Ford was able to generate enough cash in 2020 so that prior to YE, it repaid all of the revolver borrowings it had drawn in March 2020. However, a portion of the cash used to repay the revolver borrowings ultimately came from proceeds from the 2020 notes issuance.

Actual leverage in 2020 spiked, both on a funds from operations (FFO) and EBITDA basis, as a result of the pandemic-driven decline in profitability, as well as the higher level of outstanding debt. Fitch expects both measures to moderate in 2021 and beyond, but as with FCF, the pace of improvement will depend on a combination of macro factors and the company's own success in achieving improved margins.


Derivation Summary

Ford's business profile is similar to other large global volume auto manufacturers. From an automotive revenue perspective, it is larger than General Motors Company (GM) but smaller than Stellantis N.V. (STLA). Compared with GM, Ford's operations are more globally diversified, with significant operations in most major auto markets. However, from a brand perspective, Ford is less diversified than Volkswagen AG (VW), STLA or GM, focusing primarily on its global Ford brand and, to a much lesser extent, its Lincoln luxury brand, which is only available in North America and China. However, the company sells a wide range of vehicles under the Ford brand globally, ranging from small economy passenger cars to heavy trucks in certain global markets. Ford has a particularly strong market share in the highly profitable North American pickup and European light commercial vehicle segments.

Ford's credit profile has recently been weaker than that of global auto manufacturers in the 'BBB' category, such as GM, STLA and VW. Ford's operating and FCF margins have been lower and gross leverage has been higher than similarly rated global auto manufacturers. However, Ford has one of the global industry's strongest liquidity positions, providing it with significant financial flexibility.


Key Assumptions

Fitch's Key Assumptions Within Its Rating Case for the Issuer:

--Global auto production rises by 6% in 2021, including an 8% increase in U.S.;

--Capex runs at $6.5 billion and remains near that level until operations begin to normalize;

--Automotive FCF, excluding redesign initiatives, nears breakeven in 2021, with positive FCF in later years;

--The company continues with its global redesign initiatives;

--Ford Credit caps its assets at $155 billion, allowing it to make substantial distributions to Ford over the next several years.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Fitch does not expect Ford's ratings to be considered for an upgrade until the global macro environment has normalized;

--Sustained North American automotive EBIT margin of 6.0%;

--Sustained global automotive EBIT margin near 3.0%;

--Sustained FCF margin near 1.5%, excluding restructuring costs;

--Sustained FFO leverage near 2.0x, excluding restructuring costs.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--During the operational slowdown, and following the drawdown of the revolvers, an extended decline in cash below $15 billion;

--Sustained global automotive EBIT margin near 1.5% in a more normalized operating environment;

--Sustained negative FCF, excluding restructuring costs, in a more normalized operating environment;

--Sustained FFO leverage near 3.0x, excluding restructuring costs, in a more normalized operating environment.


Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.


Liquidity and Debt Structure

Strong Liquidity Position: Ford had about $31 billion in automotive cash and marketable securities as of Dec. 31, 2020 (excluding Fitch's adjustments for not readily available cash). In addition to its cash and marketable securities, as of Dec. 31, 2020, Ford also had nearly full availability on its $13.5 billion primary revolver (after accounting for $27 million in LOC) and full availability on its $2.0 billion supplemental revolver. It also had a total of about $700 million available on various local credit facilities around the world. About $400 million of the primary revolver commitments mature in 2022, $3.0 billion matures in 2023 and the remainder matures in 2024. For the supplemental revolver, about $200 million of the commitments mature in 2022, with the remaining $1.8 billion maturing in 2023.

According to Fitch's Corporate Rating Criteria, when analyzing a corporate issuer with a captive finance subsidiary, Fitch calculates an appropriate target debt-to-equity ratio for the finance subsidiary based on its asset quality, funding and liquidity. If the finance subsidiary's target debt-to-equity ratio, based on Fitch's calculations, is lower than the actual ratio, Fitch assumes that the parent injects additional equity into the finance subsidiary to bring the debt-to-equity ratio down to the appropriate target level. Fitch then considers the effect of this equity injection in its analysis of the parent's credit profile. Fitch has calculated a target debt-to-equity ratio of 4.0x for Ford Credit. As a result of its most recent analysis, Fitch has assumed that Ford makes a $16.5 billion equity injection into Ford Credit, funded with available cash, to bring Ford Credit's debt-to-equity ratio down to the 4.0x target. The resulting adjustment reduces Fitch's calculation of Ford's readily available automotive cash, but the company's metrics remain supportive of its 'BB+' Long-Term IDR.

In addition to the captive-finance adjustment, according to its criteria, Fitch has treated an additional $800 million of Ford's automotive cash as "not readily available" for purposes of calculating net metrics. This is based on Fitch's estimate of the amount of cash needed to cover typical seasonality in Ford's automotive business. However, even after excluding the amounts noted above from its liquidity calculations, Fitch views Ford's automotive liquidity position as strong.

Debt Structure: Ford's automotive debt structure consists primarily of nearly $19 billion in senior unsecured notes, $1.5 billion in delayed draw term loan borrowings and $1.2 billion in remaining borrowings outstanding under the U.S. Department of Energy's Advanced Technology Vehicles Manufacturing incentive program, along with various other long- and short-term borrowings.


Date of Relevant Committee 06 May 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Ford has an ESG Relevance Score of 4 for Management Strategy due to the complexity and costs of the company's global redesign strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg



Ford Motor Company
----senior unsecured; Long Term Rating; New Rating; BB+

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Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

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