S&P sees Ford dependent on ABS for next few quarters until spreads tighten

By Ronda Fears

Nashville, Tenn., Aug. 23 - Ford Motor Co. and Ford Motor Credit Co. will remain dependent on the asset-backed securities market for funding until credit spreads tighten, according to Standard & Poor's analyst Scott Sprinzen.

"Ford continues to benefit from having a liquid balance sheet," Sprinzen said in a report Friday, noting that Ford's gross automotive liquidity of $24.9 billion at June 30 benefited in part from the 6.5% convertible trust preferred offering in January.

"Continuing turmoil surrounding Ford, however, has recently resulted in a significant widening of its credit spreads. If this persists, it could cause Ford Credit to become disproportionately dependent on the ABS market as a funding source."

Market sources have report some tightening in Ford's spreads this week.

"Financial flexibility and liquidity remain satisfactory in light of Ford's large cash balances, ample contractually committed bank credit facilities and access to the ABS market," Spinzen said in the report.

"Standard & Poor's assumes that as Ford's operating performance improves, Ford Credit's credit spreads will tighten such that it will once again be economic for Ford Credit to pursue a more balanced funding approach, rather than depending so highly on ABS funding, as is likely for the next few quarters."

Sprinzen said Ford's ratings (BBB+ senior) could be lowered if at any point S&P doubts Ford is on a trajectory to more satisfactory earnings.

Ford's ratings reflect an average competitive position and a precipitous deterioration in profitability in 2001.

S&P expects Ford to report 2002 net earnings of less than $1 billion but sees the timing and extent of improvement in profitability after 2002 highly uncertain.

Because of deteriorating business conditions, the S&P analyst noted that Ford has made preserving its remaining liquidity more of a priority.

Share repurchases were discontinued as of May 2001 and the common dividend has been cut twice in the past six months. In addition, Ford completed a $4.9 billion issuance of a convertible trust preferred earlier this year.

Under new management, Ford has initiated various restructuring actions, Sprinzen acknowledged.

In January, the company announced its so-called revitalization plan, combining various ongoing efforts with new tactics, notably closing five plants and downsizing other facilities by mid-decade, accelerating cost reduction efforts with a targeted $3 billion in savings by mid-decade and discontinuing low-margin models.

"There are considerable risks, however, that Ford's efforts will fall short," Sprinzen said.

Ford management recently acknowledged that progress in reducing material costs has been slower than expected, necessitating an incremental increase in the engineering staff dedicated to this task, the analyst noted.

Also, Ford's plans to curtail production capacity could face opposition from the United Auto Workers, he added.

"Moreover, Ford's plans also assume some improvement in market share," Sprinzen said.

"However, even stabilizing market share will be a considerable challenge."

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