Credit analyst: bond market may have spooked rating agency on Ford

By Ronda Fears

Nashville, Tenn., Oct. 17 - Carol Levenson, director of research at Gimme Credit, said she sees more downside for Ford Motor Co. paper on credit concerns, but noted that the bond market's harsh reaction to events at Ford may have sparked a looming downgrade for the automaker.

"Near the end of Ford's (Baa1/BBB+) fairly upbeat quarterly conference call with fixed income investors yesterday, the company received the discouraging news that S&P was reviewing it for a downgrade and had already abruptly downgraded GM without a review or even outlook change," Levenson said in a report Thursday.

"While we certainly wouldn't disagree with a decision to downgrade Ford, we wonder about the timing. We suspect the wild and woolly corporate bond market, reportedly spooked last week by rumors of a downgrade, may actually have caused this rating action."

Ford's third quarter earnings release didn't appear to contain any bombshells, the analyst pointed out. Ford's automotive performance was nothing to write home about, she said, but it was not shockingly worse than it's been lately.

Depending on how you count Ford's convertible preferreds, she said, the company had somewhere between $6 billion and $12 billion of cash in excess of its automotive debt. Either way, she added, this figure rose by $1 billion in the quarter.

"The source of improvement, automotive free cash flow, does not give us a warm feeling," Levenson added.

"That's because of the $700 million in automotive free cash flow in the quarter, $1.8 billion came from a tax refund and $400 million came from a Ford Motor Credit dividend. Without these cash flow helpers, automotive free cash flow was a negative $1.5 billion, so presumably automotive debt would have increased by this amount in the quarter."

Ford's U.S. pension plan was fully funded at the end of last year, but with returns down 15% year-to-date it was underfunded by $6.5 billion at the end of September. Ford claims it will be years before it will be required to make a cash contribution to its pension fund, she said, but it seems likely this is where any surplus cash flow will be applied in the future.

"Ford continues to strive to reassure fixed income investors it has sufficient alternative sources of funding lined up," Levenson said.

"The inability, however, to tap the unsecured bond economically obviously reduces financial flexibility markedly. We see additional downside in this name."

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