Ford bucks pressure from S&P cut; credit, convertibles up on stable outlook

By Ronda Fears

Nashville, Nov. 12 - Ford Motor Co.'s credit firmed against pressures from a downgrade by Standard & Poor's because, traders said, the rating outlook was revised to stable from negative.

Even Ford stock gained in the face of the credit rating cut to BBB-, just one notch away from junk.

"There was a stampede to the convert, the volume was off the charts," said a convertible dealer.

"The downgrade was no big surprise but the reaction to the outlook sparked some buying that just built on itself. Ford was up across the board, the stock, the converts, the straight bonds and the [credit default] swaps."

Ford's 6.5% convertible trust preferreds closed up 2.25 points, or 4.86%, to 48.5 on the New York Stock Exchange with 3.1 million shares changing hands, versus the three-month running average volume of 511,301 shares.

Ford stock ended up 75c, or 6.09%, to $13.06, also on heavy volume. Some 35.5 million shares of Ford stock traded compared with the average 9 million shares.

The convertible dealer said Ford's straight bonds tightened along with the CDS securities, "maybe as much as 50 or 60 basis points."

"The Ford story, particularly on the credit side, was ripe for an upside surprise. The spreads had been widening out on the risk of a negative outlook hanging over it," the dealer said.

"Now, in a rally scenario, everyone wants to get involved early."

Standard & Poor's cut Ford's long-term debt to BBB- and short-term debt to A-3. The rating outlook, though, was changed to stable from negative.

Ford responded to the S&P downgrade with a conference call early Wednesday afternoon.

"I am very encouraged by today's [market] reaction," said Malcolm Macdonald, vice president of finance at Ford.

The downgrade may cost Ford on borrowings going forward, he said, but the capital markets still are inviting to the automaker.

"I am optimistic that we will maintain access to the capital markets," particularly the ever-important asset-backed securities market, Macdonald said.

Bank covenants or collateralization requirements are not expected to be onerous, either.

This year, amid the downgrade review of the BBB rating and a negative outlook, Ford renewed $30 billion of credit facilities without any restrictive covenants or rating triggers tacked on, he noted.

"Could pricing go up? That one I'm probably a little more nervous about," Macdonald said.

It is premature to discuss any changes, if indeed there are any, to Ford's mix of funding instruments, he said. That said, he did offer that there doesn't seem to be any inclination to move from bilaterals to syndicated bank lines.

Moreover, with cost savings mounting to a target of $3 billion by year-end and liquidity in the neighborhood of $48 billion - including that of Ford Motor Credit Corp. - Ford executives were disappointed with the downgrade.

"We do not agree with Standard & Poor's conclusion," said Don Leclair, Ford chief financial officer.

"We do not believe it accurately reflects the state of our business and the positive progress we have made over the past two years. We're just completing year two of a multi-year plan. We've made good progress so far. Bottom line: we're a much stronger company than we were two years ago."

He pointed out that on Oct. 16, Ford increased its 2003 full-year earnings guidance from continuing operations, excluding special items, to a range of 95c to $1.05 per share from 70c per share.

"We are in a solid position with a strong plan in place. We have every reason to believe our financial position will continue to improve," Leclair said, noted that the company expects to breakeven or make a little money in fourth quarter.

As cost savings kick in next year, earnings and cash flow will get even better, he added.

"We expect the total and automotive [earnings] to go up next year," Leclair said, responding to a comment on the call that S&P saw automotive earnings rising while finance earnings decline.

"I do expect operating cash flow improvement to go along with earnings improvement, too. Cash flow has been good, in our opinion."

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