Gimme Credit analyst: Ford credit hasn't bottomed out

By Ronda Fears

Nashville, Tenn., Jan. 18 - On the heels of Ford Motor Co.'s earnings report, Gimme Credit analyst Carol Levenson said she questions whether the lowered credit ratings for Ford (Baa1/BBB+) are low enough. Fundamentally, she said in a report Friday that her outlook for Ford credit has worsened since reviewing the earnings and she sees no reason to believe the credit has bottomed out.

It appears the troubled automaker will need a minimum of $8 billion in cash to cover capital spending and dividends in order to keep its net liquidity position stable this year, Levenson said. Since it is unlikely that much could be sourced from financial services, asset sales and the company's convertible offering, she said Ford 's automotive operations are likely to move into a positive net debt position very soon.

"Maybe we shouldn't have complained earlier this week about the lack of information regarding cash and cash flow in Ford's vaunted revitalization plan," said Levenson, director of research for Gimme Credit, an independent research service for institutional investors in corporate bonds.

"In the cold, clear light of Ford's fourth quarter earnings release and its filing of a prospectus (for $3 billion in convertible trust preferred securities), the outlook for these vital measures appears to be even worse than we'd imagined."

Ford lost nearly $900 million in the quarter before special charges and nearly $800 million for the year. And Levenson noted that the paltry $6 million earnings contribution of Ford Credit, down from $410 million in the prior year, left the glaringly weak automotive operation bereft of its usual serving of financial helper because of weakness at the unit. Although the auto operations are to a large degree are helpless victims of the economy and competition, she said, Ford Credit and other financial services operations no longer a part of Ford have historically been a stabilizing force.

"In order for Ford to meet its seemingly modest goal of breaking even this year, it's vital for Ford Credit to stabilize its credit quality and return to more normal levels of profitability," Levenson said.

The good news, she said, is that the number fixed income investors care most about, Ford's net liquidity position, actually improved in the fourth quarter by $800 million to $3.9 billion excluding the trust preferred. "However, we're a trifle fuzzy about precisely how this happened, thanks to a very abbreviated cash flow statement," Levenson said in the report. But with automotive operations suffering a big loss and little help from financial services, she noted that Ford managed to generate positive free cash flow, apparently driven by working capital improvements.

The bad news, she said, is that - according to management and as disclosed in the prospectus filed Thursday - Ford's automotive operations are expected to generate negative cash flow from operations this year. She noted that the figure is before $7 billion in capital spending and $700 million in dividends, and assumes a $2 billion pretax profit increase from the revitalization plan as well as additional working capital improvements.

"The magnitude of negative cash flow has not been estimated. Ford resolutely does not forecast cash or cash flow. But obviously it represents a drop of more than $10.1 billion in automotive operating cash flow, the amount generated by automotive operations last year despite a loss from automotive operations of $2 billion," Levenson said in the report.

"So this implies a much bigger loss from automotive operations this year, as well as a huge falloff in other sources of operating cash flow. It also means a minimum of $8 billion in cash to cover capital spending and dividends would have to come from financial services, asset sales and the issuance of equity-like securities simply for Ford's net liquidity position to remain stable this year. Clearly, this is unlikely to happen, meaning Ford 's automotive operations are likely to move into a positive net debt position very soon.

"Ford's prospective cash flow situation overwhelms any talk of market share, industry volume, marketing costs, or new products, not to mention its revitalization plan. It calls into question whether its lowered ratings are low enough. And with another couple of downgrades, the company would lose the limited access to the commercial paper markets it still retains. Fortunately, alternative sources of funding are in place, and Ford 's reliance on commercial paper has been cut back dramatically. As our outlook worsens, we see no reason to believe this credit has bottomed out."

End

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