Struggling operations in Asia and Europe prompted Ford to cut its 2018 profit forecast. The company posted about a 50 percent decline in earnings for the second quarter, followed by a nearly 40 percent decline in the third quarter.
Its shares last month fell to their lowest level since 2009. Ford’s bonds trade at risk premiums similar to those of junk-rated companies in the auto industry, such as Allison Transmission Holdings Inc. and Dana Inc., and have since Moody’s cut the company to a step above junk in late August, according to Bloomberg Intelligence research. The bonds have rallied recently, but still trade at risk premiums higher than Fiat Chrysler, which is rated junk, and GM, signaling investors believe Ford is a bigger credit risk.
One source of support as the company tries to fix itself is its cash position: Ford had around $35 billion of liquidity as of Sept. 30. That’s given comfort to credit raters, who have noted it as a positive. Earnings margins and operational challenges outside the U.S. are top concerns to Moody’s, which rates Ford Baa3. S&P and Fitch Ratings both rate the company one step higher at BBB.
More Cuts?
Ford would need to be cut to high yield by two ratings firms before it fell out of the investment-grade index. Many money managers don’t see that as likely, even if Moody’s decides to cut the company to speculative-grade, said Joel Levington, a former S&P director and now head of credit research for Bloomberg Intelligence. Ford has options for avoiding downgrades, Levington said, including cutting its dividend -- a step the company has insisted it won’t take -- or selling less profitable units.
“To get to the place where you’re talking about two rating agencies going to high-yield, you’re saying not only is the company a basket case, but that it isn’t doing anything to stave off either of those actions,” Levington said. “I wouldn’t assign a high probability around that.”
To some money managers, current trading levels represent an attractive buying opportunity. The company’s bonds pay high yields and the credit quality is relatively high, said Matt Brill, senior portfolio manager at Invesco Ltd.
“Ford generates a lot of cash flow and they have so much more flexibility than they did a decade ago,” with regard to costs, he said.
But bond analysts caution that the debt is by no means a slam-dunk investment. Carmakers are cyclical businesses, and as the Federal Reserve raises rates, increasing financing costs for consumers, vehicle sales aren’t likely to improve much, if at all, from here.
“Autos were always the light that everyone’s looked to in this post-recession era,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC. “I don’t think investors are looking at them on that momentum story that they once had, or looking at them as the beacon of hope that they once were.”
This article was provided by Bloomberg News.