DETROIT -- Ford Motor Co., following the ratification of its new four-year labor contract with the UAW this week, is inching closer to investment grade, but isn't quite there yet.
Standard & Poor's today raised the corporate credit rating on Ford and Ford Motor Credit Co. to BB+ from BB–.
That's still junk-rated, but it's the highest level of speculative grade. The lowest level of investment grade is one notch above BB+ at BBB–.
In a press release today, S&P said Ford's new four-year labor contract with the UAW "has been ratified; we believe the contract will allow for continued profitability and cash generation in North America. Ford has a two-year track record of profits and cash flow generation in its global automotive operations, supported by strong performance in North America."
There was no word on whether the other major ratings agency, Moody's, would follow suit.
Ford executives told the financial community on Thursday that the new contract would raise its labor costs less than 1 percent annually. The company expects further efficiencies from its North American assembly plants.
"We continue to make progress on our plan, and we are pleased with these positive steps," Ford said in a statement today. "Ultimately, the credit rating agencies determine our ratings. Our job is to stay focused on making progress on our plan."
In the press release, S&P credit analyst Robert Schulz said: "The upgrade reflects our view that, among other things, Ford's prospects for generating free cash flow and profits in its automotive manufacturing business remain intact, because of its cost base in North America."
S&P said Ford's automotive operations in North America will remain profitable with industry light-vehicle sales of more than 11.5 million units.
The ratings agency said Ford has "good prospects" for generating automotive operating cash flow even if the key U.S. auto market does not recover significantly.
“As long as they continue on the track they’re on, and providing that the auto industry doesn’t tank, they should be pretty well on their way to investment grade,” Jody Lurie, a credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a phone interview. “I see it as a possibility in the near term. They have investment grade in their eyesight.”
But S&P noted that "cash flow will be sensitive to volume and cost headwinds --including commodity prices and other cost increases -- as well as future production volatility." Those factors, it said, could affect year-over-year cash-flow generation.
Also, as Japanese automakers' inventories recover, the agency said, other manufacturers could see some "modest market share losses" in the United States "over the coming quarters."
Bloomberg contributed to this report.