Ford Motor Company's chief executive officer Jim Hackett has been dealt a major blow by Moody's Investors Service, which cut the carmaker's credit rating to junk over doubt his plans to fix the carmaker will soon generate earnings and cash.
Moody's downgraded Ford to the highest non-investment grade rating, Ba1, saying the automaker's cash flow and profit margins are below expectations and likely to remain weak over the next two years. The descent to junk status affects one of the 15 biggest corporate bond issuers in the U.S. outside the financial sector.
The lower rating reflects "the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan," Moody's analyst Bruce Clark said in a statement Monday.
Ford's most actively-traded bonds, Ford Motor Credit Co.'s 5.113 per cent bonds due 2029, weakened relative to Treasuries. The extra yield, or spread, the notes pay widened 0.13 percentage point to 3.27 percentage points, according to Trace. The automaker's shares plunged as much as 4.2 per cent to $9.14 in late trading.
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Investors have been contemplating whether Ford would be able to maintain its investment-grade status for the past year, as slowing sales have weighed on profits. Hackett has struggled to win over Wall Street with an overhaul that calls for cutting thousands of jobs, reviving an ageing line of SUVs and pickups and ditching slow-selling sedans.
"Ford remains very confident in our plan and progress," the carmaker said in an emailed statement. "Our underlying business is strong, our balance sheet is solid and we have plenty of liquidity to invest in our compelling strategy for the future."
S&P Global Ratings and Fitch Ratings have a BBB grade on Ford, which is two steps above junk. Both have a negative outlook.
"We think there's a high probability that if they were to downgrade Ford to BBB-, it would come along with a stable outlook," said Joel Levington, an analyst at Bloomberg Intelligence. "And if that happened, then you would still be an investment-grade issuer for bond index purposes."
In July, Ford issued an annual profit forecast that disappointed investors as the automaker struggles to compete in China's slumping car market. New versions of Ford's Explorer and Escape SUVs debut this year, and it's bringing back the Bronco off-roader in 2020.
The cost of insuring Ford's bonds against default jumped in the derivatives market. Guaranteeing Ford Motor Co. debt now costs 1.83 per cent a year, up 0.15 percentage point from Friday's levels, according to data compiled by Bloomberg. That's the biggest one-day jump since May.