Ford Motor Co. could be close to getting junked again.
That’s what the bond market is saying. The company’s debt is trading like it’s speculative grade, as investors worry about how higher steel tariffs and slowing sales will weigh on its profits. Ford is rated one step above junk by Moody’s Investors Service and two steps by S&P Global Ratings.
Any downgrade could be painful for bond investors, and for the company. The automaker has more than $150 billion of short- and long-term debt globally, and is one of the 15 biggest corporate bond issuers in the U.S. outside the financial sector. Hedge funds turned in their worst monthly performance in nearly three years in the first part of 2005, when Ford was cut to junk along with General Motors Co.
Bob Shanks, Ford’s chief financial officer, said on an earnings call last month that the company is committed to maintaining its investment-grade ratings, and doesn’t intend to lose that status again. The company is “moving with a sense of urgency and taking proactive steps to redesign and restructure the business,” and over time "the market will recognize our progress,” spokesman Brad Carroll said.
But debt investors are skeptical. The extra yield that money managers get for holding Ford’s 4.346 percent bonds due 2026 rather than similar Treasuries jumped to levels typical of high-yield companies. The cost of protecting Ford’s debt against default using credit derivatives rose in October to the highest levels since 2012 before settling down again. Moody’s downgraded the company in August to one level above junk, and said further cuts are possible in the medium term.
“There’s a better chance than not it ends up in high yield,” said Henry Peabody, a portfolio manager at Eaton Vance Corp. in Boston. “It’s a combination of a fairly weak strategic position, less than ideal strategic decisions over last handful of years, a smattering of overconfidence and where we’re at in the credit cycle.”
Ford is fighting a “multiple-front war,” Peabody said, citing the company’s slowing sales growth in China and higher costs in the U.S. from global trade disputes.
Ford fared better during the financial crisis than GM and the automaker now known as Fiat Chrysler Automobiles NV, avoiding bankruptcy and the government-backed bailouts that its competitors received. But losing its investment-grade status forced Ford to finance itself on a secured basis, essentially putting everything from its inventory to the rights to its oval blue logo in hock. When Ford reclaimed its investment-grade ratings in 2012, after it cut debt and profits jumped, Chairman Bill Ford announced the upgrade to employees on the public-address system normally used for fire drills in Ford’s Dearborn, Michigan headquarters.
“When we pledged the blue oval it was enormously emotional for me personally and for my family, because we weren’t just pledging an asset, we were pledging our heritage,” Ford said in May 2012. “To get that back feels wonderful and this is one of the best days I can remember.”
New Trouble
Now the company is facing difficulty again. Ford told investors in July it is launching an up to five year overhaul that could cost it $11 billion, as it focuses on higher margin products like trucks and sport-utility vehicles and exits businesses including its U.S. sedans. However, it has provided scant details on the restructuring plan, and has yet to reschedule an investor meeting that was originally set for September.