A 2017 Ford Motor Co. Super Duty F-250 truck sits outside of the Ford Kentucky Truck Plant in Louisville, Kentucky, U.S. (Photographer: Luke Sharrett/Bloomberg)

Ford Teeters Toward Junk With Moody's Warning of Restructuring Risks

(Bloomberg) -- Ford Motor Co.’s credit rating was cut to one notch above junk by Moody’s Investors Service, adding to the car company’s woes after it embarked on a costly restructuring that could take years to complete.

Moody’s downgraded Ford to Baa3 from Baa2 with a negative outlook, it said in a report Wednesday. The ratings company cited erosion in Ford’s “global business position and the challenges it will face implementing” its restructuring effort that could rack up $11 billion in the next three to five years.

Ford’s 5.291 percent notes due 2046 were among the biggest decliners in the U.S. investment-grade market Wednesday, falling to the lowest since their 2016 issue, to about 91 cents on the dollar, according to Trace data. The firm’s shares also fell to close 0.4 percent down at $9.97 in New York trading.

A descent into junk would be a blow to Ford after six years of investment-grade status. The automaker avoided joining its U.S. peers in bankruptcy during the financial crisis, thanks in part to more than $23 billion in loans taken out in 2006. Now, amid a fresh financial squeeze, Chief Executive Officer Jim Hackett is pushing his so-called fitness initiative to shore up cash.

Ford Teeters Toward Junk With Moody's Warning of Restructuring Risks

“The fitness program is a necessity, but it will take several years for material financial and operating benefits of the program to be realized,” Moody’s analysts wrote in the note. “Success could be challenged by having to address the serious performance problems in multiple business units simultaneously.”

Just last month, S&P Global Ratings cut Ford’s outlook to negative from stable and said prolonged weakness in profit and cash flow made a downgrade within two years increasingly likely. S&P rates Ford at BBB, two levels above speculative grade.

The automaker, which last month lowered its profit forecast for the year, is facing a number of headwinds beyond exiting the slowing sedan business in North America. The cost of complying with tougher emission rules in Europe and updating a stale product line in Asia contributed to second-quarter losses in those regions.

Ford’s leverage level, a measure of its earnings in relation to its debt, has risen from 2.6 times to 3.3 times between 2016 and the twelve months ending June 2018, according to Moody’s. Slipping closer to junk status puts Ford at risk of higher borrowing costs.

Abandoning Sedans

Earlier this year, Ford announced it would abandon its storied U.S. sedan business, sending shock waves through the auto landscape. In addition, Ford and its Detroit counterparts have been in the crossfire of President Donald Trump’s trade talks with China and Mexico this year, causing volatility among U.S. automakers.

Since the 2008 recession, Ford has had solid financial results and operating cash flows, said company spokesman Brad Carroll in response to the downgrade.

“The company has a strong balance sheet, which provides financial flexibility. We know we can capitalize on our strengths, bolster underperforming products and regions and disposition where we cannot make an appropriate return. We’re confident that as we do, the market will recognize our progress.”

Ford was the only one of the "Big Three" U.S. automakers to avoid bankruptcy during the financial crisis, thanks in part to the loan package. The company ultimately secured almost everything it owned -- including inventory, factories and brands -- against the debt, and carried junk credit ratings from multiple ratings firms until 2012.

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