Ford’s Downgrade to Junk Revives ‘Fallen Angel’ Fears
(Bloomberg Opinion) -- The downgrade of Ford Motor Co.’s debt to junk by Moody’s Investors Service on Monday will most likely spark a fresh wave of soul-searching among investors about the risk of highly leveraged companies that are clinging to investment-grade ratings.
Moody’s cut Ford’s credit rating one level to Ba1 from Baa3. If it’s downgraded to junk by either S&P Global Ratings or Fitch Ratings, it will officially become a “fallen angel,” with its debt sent away to high-yield indexes.
The good news for those who hold Ford’s roughly $84 billion of outstanding public bonds and loans is that the other two big credit rating companies rate the automaker BBB, two steps above speculative grade. Both have a negative outlook (as Moody’s did before its downgrade), but Ford is at least a bit further from the brink with S&P and Fitch than it was with Moody’s, though it’s hardly unprecedented for a company to have its rating lowered by two or more notches at a time.
Moody’s said the downgrade reflected “the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan. … Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers.”
But the passage that will catch the broader credit market’s attention is the following:
“The erosion in Ford's performance has occurred during a period in which global automotive conditions have been fairly healthy. Ford now faces the challenge of addressing these operational problems as demand in major markets is softening, and as the auto industry is contending with an unprecedented pace of change.”
It’s not hard to extrapolate this kind of reasoning to a number of companies that are legacy household names, saddled with large piles of debt as they struggle to adapt to change in a slow-but-steady economy. General Electric Co., the conglomerate with more than $100 billion in debt, comes to mind. Remember, it was GE that prompted Guggenheim Partners’s Scott Minerd to tweet late last year that “the slide and collapse in investment grade credit has begun.”
That obviously didn’t happen, with U.S. high-grade corporate debt returning more than 13% this year. Those invested in triple-B bonds did a bit of a victory lap, saying the hysteria over mass downgrades was overblown, particularly because the Federal Reserve stopped raising interest rates and starting dropping them again.
To be fair, speculation about a potential Ford downgrade existed even before Minerd made his dire prediction. Bloomberg News’s Molly Smith quoted a portfolio manager 10 months ago who said that Ford was fighting a “multiple-front war” and that “there’s a better chance than not it ends up in high yield.”
Well, now it is, at least as far as Moody’s is concerned. For Ford’s management, it will have to wait and see whether this cut causes the other rating companies to follow suit. For bond investors, the pressing issue is that that Ford has many of the same characteristics that had them spooked not too long ago. They’ll have to decide whether the risk they cast aside for much of this year deserves another round of scrutiny.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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