DETROIT -- Ford Motor Co. continues to steadily shovel away the mountain of debt it took on to pay for its restructuring. But a rating agency says that whacking debt isn’t the only barrier to Ford’s bonds moving out of the junk category.
The automaker’s stated goal is to regain an investment-grade rating, which is considered a prerequisite of lowering its borrowing costs. Doing so would make it less expensive for Ford, and Ford Motor Credit, to raise both day-to-day operating funds and the money it then lends to dealers and customers.
In the first quarter, Ford axed another $2.5 billion in debt, bringing its total outstanding debt to $16.6 billion as of March 31. In late 2006, Ford took on $23 billion in debt, even putting up its blue-oval logo as collateral.
Ford remains three notches below an investment-grade rating. Standard & Poor's Ratings Services has said there’s a chance Ford could get an upgrade of one or more notches in 2011.
On April 26, after Ford issued its first-quarter results, the ratings agency spelled out what Ford must still do to see an upgrade.
S&P analyst Robert Schulz told Automotive News reporter Jamie LaReau that this isn’t a comprehensive list. But it’s a pretty good indication of what Ford needs to do to reassure rating agencies that Ford is out of the woods.
Most of S&P’s requirements, as you might expect, are financial targets. Here they are, along with Ford’s position, as laid out by Ford top management:
S&P: Exceed $4 billion in positive cash flow this year.
Ford: The goal is for this year’s automotive pretax cash flow to be better than 2010’s $4.4 billion.
S&P: Keep pre-tax automotive profit margins in the upper single-digit range in North America, and in the mid single-digit range overall.
Ford: The goal is for this year’s operating pretax margins to be equal to or better than last year’s.
S&P: Remain profitable in Europe, or at least avoid large losses.
Ford: We expect each of our automotive business units to be profitable this year.
Mark Fields, Ford’s president of the Americas, declined to go beyond the automaker’s stated financial goals in responding to the S&P comments. “It’s up to the rating agencies to make their determination on the company’s rating,” he said. “It’s up to us to make sure we continue to improve every element of the business.”
But he noted that Ford’s improved finances mean that it already is getting better borrowing terms.
“When you look at our borrowing costs,” he said, including bond issues by Ford Credit this year, “many of the banks are treating us, in terms of the rates, as if we were investment grade. I think that’s a nice proxy for the market telling us we’re heading in the right direction.”
But S&P wants to see more than good numbers. For Ford’s credit rating to go up, the rating agency says the automaker must “adequately” resolve this year’s U.S. labor contract negotiations.
S&P’s Schulz says the ratings agency’s base expectations for a new contract are for “possibly higher costs and maybe some commitments to do more work in the United States.” S&P isn’t expecting anything particularly negative, he says, but the new contract’s implications are “something we want to make sure we understand.”
Ford, and General Motors and Chrysler, all want a fairly quick round of UAW negotiations this fall that will produce a contract both sides can live with.
But for now, the S&P guidance on how Ford can raise its credit rating amounts to this:
Don’t expect any major action from the rating agency before autumn.