Ford’s Credit Gets a Boost From Fitch

Ford’s attempts to increase profitability, grow liquidity, lower debt, and reduce the company’s pension obligations have paid off as Fitch Ratings has upgraded the Issuer Default Ratings for Ford Motor Company and Ford Motor Credit to BBB- from BB+.

According to Fitch, the rating outlook for both Ford and Ford Credit is stable and the upgrade reflects the automaker’s “significantly improved financial performance, balance sheet repair, and product portfolio improvement that have taken place over the past several years.”

Despite Ford’s stronger financial position, the company continues to face a number of risks like the ongoing uncertainty regarding the strength and pace of the global economic recovery and the durability of global auto demand, Fitch said.

So how would a severe downturn impact Ford’s credit profile? Fitch’s analysis included a focus on that scenario. The prediction? Ford would burn a substantial amount of cash in a downturn. However, the company’s net cash position of nearly $10 billion at yearend 2011 and other sources of liquidity give Ford the ability to withstand this likely cash burn without creating liquidity pressures.

From a product perspective, Ford’s vehicle lineup has performed relatively well in the post-recession period, Fitch noted.

In 1Q12, Ford’s light vehicle marketshare fell to 15.3% from 16% in 1Q11, despite a nearly 9% increase in light-vehicle sales. However, Fitch expects net pricing to remain strong for Ford’s products, particularly in the compact car segment, where the new Focus compares favorably with its key Asian competitors.

“The introductions later this year of completely new Fusion and Escape models are likely to further support both increased sales and net pricing,” Fitch said.

Fitch expects Ford Credit’s ratings to move in tandem with its parent. However, a material increase in leverage, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio, could become restraining factors on the parent’s ratings.

We would add that we’re hearing Moody’s will also bump up Ford’s credit rating soon. No word from Moody’s yet, however.