Credit analysts sees Ford's wider spreads as appropriate but calls move out "bizarre"

By Ronda Fears

Nashville, Tenn., Aug. 12 - Carol Levenson, director of research at Gimme Credit, said the blowout of credit spreads on Ford Motor Co. paper last week reflects her skepticism but because of the mystery of the widening she can't see what will spur a tightening.

"We're as mystified as the next guy about the bizarre trading behavior of Ford (Baa1/BBB+) paper late last week," Levenson said in a report Monday.

"We believe current weaker spreads better reflect our credit opinion, but since we don't really understand what caused the sudden widening, it's tough to say what could prompt a tightening in the near term."

So prevalent were the rumors of a downgrade, she noted, the rating agencies took the unusual step of saying they weren't contemplating any rating actions at this time, although both agencies carry negative outlooks on Ford.

"Given the increased frequency and severity of rating actions these days, especially with regard to cyclical companies, a Ford downgrade shouldn't come as a shock to the bond markets, particularly as economic vital signs remain weak," Levenson said.

"We can only presume the markets feared something even worse, such as an accounting scandal."

Not that Ford is flourishing, the analyst said, but second quarter results did contain some positive elements, particularly on the closely watched liquidity front.

The gross cash position of the automotive business, which includes cash, marketable securities and VEBA investments, increased by $3.2 billion from the first quarter, while automotive debt remained unchanged.

This means Ford ended the second quarter with cash in excess of debt, counting the trust preferred securities as debt, of more than $5 billion, she said.

"While this is not a huge cash cushion, particularly if we were to experience a "double dip" recession, it's a definite improvement," Levenson said.

"We refrain from being too jubilant about this, however, as seasonal working capital effects and a huge tax refund were responsible for much of the sequential increase in automotive cash flow in the quarter."

Although Ford's year-over-year cash flow improvement was the result of a huge positive swing in automotive net income, she said investors should bear in mind that last year's second quarter suffered from some $2 billion in costs for the Firestone tire replacement program.

"If we exclude these hopefully nonrecurring costs, Ford's automotive profit in the second quarter was down considerably from the prior year," Levenson pointed out.

Management was refreshingly frank in admitting the company is not executing on its massive cost reduction program as speedily as they had hoped, but it plans to devote more resources to reducing product costs and also intend to expand the scope of cost-cutting efforts. Levenson added.

"Meanwhile, the company is struggling with a brutal competitive environment and continuing high incentive costs while battling to regain its prior market share," Levenson said.

In the second quarter, Ford showed some sequential improvement in its U.S. market share, although this remains well below last year's share in both cars and trucks.

"Naturally investors are worried about Ford's postretirement costs and its pension fund returns, but management claimed even with conservative return assumptions the company should not have to make a cash contribution to its U.S. pension fund (underfunded by $3.2 billion at the end of the first half) before 2006 at the earliest," she said.

"Ford Credit's performance, a concern in prior quarters, appears to have stabilized for now, and although Ford took no dividend from Ford Credit in the second quarter, neither did it contribute any capital to its financing arm. We note Ford reported earnings nearly a month ago, and there's been no recent news from the company that could have prompted last week's selloff."

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