Updated from 02:00 p.m. EST
Standard & Poor's slashed its rating on
$180 billion of outstanding debt to one notch above junk Wednesday morning, but spared the bond market a major trauma by moving the automaker's outlook to stable.
Ford immediately blasted the move, in which the rating house lowered the long-term credit rating to BBB- with a stable outlook.
"We do not believe it accurately reflects the state of our business and the positive progress we have made over the past two years," the company said. Later, in an afternoon conference call, Ford executives said that the company expects to post better earnings next year. The automaker also said it would record a small profit in its European division in the fourth quarter of this year, before about $600 million in restructuring charges. It had previously forecast a break-even result.
In an earlier call following the downgrade, S&P said it expects "limited improvement" in Ford's financial performance over the next year, as the benefits of cost cutting are expected to diminish.
Still, the agency suggested Ford's stable credit outlook is sustainable. "Over the next two years, even if expected improvement in earnings and cash flow should fail to materialize, and even if the company were to experience minor losses, the ratings would not necessarily be jeopardized as long as Ford maintains a large liquidity position and Ford Credit maintains satisfactory funding flexibility," S&P said.
The spread on Ford bonds tightened, as traders breathed a sigh of relief over the stable outlook. S&P's announcement, which had been prefaced when it put the debt on ratings watch a month ago, was closely anticipated given Ford's enormous amount of outstanding debt and central role in the credit markets.
Meanwhile, Ford stock was up 57 cents, or 4.6%, to $12.88 on more than triple average volume.
"All things considered, I think people are feeling a little better about the prospects of Ford remaining investment grade, barring market deterioration," said John Atkins, an analyst at IDEAglobal.com. "If the ratings were leaning toward junk, a lot of people would want to liquidate their holdings."
The spreads on
credit were also tightening.
"My guess was that they would lower the rating," said David Healy, an analyst at Burnham Securities. "The real question was whether or not the forward outlook would continue to be stable. I think that the fact that spreads are tightening indicates the rating will stay above junk for a while."
If S&P was considering another downgrade, it would have initiated a negative outlook, Healy said.
The No. 2 automaker has been struggling with the cutthroat competition ignited by zero-percent financing in the aftermath of the Sept. 11, 2001, attacks. While the company has beaten earnings estimates the last two quarters, critics -- including Peter Eavis, a columnist on
-- have pointed out
chinks in its earnings armor and argued the outperformance won't last.
Car and light truck sales were below expectations in October, with Ford seeing a 1.9% drop.
"The combined falloff in recent demand with steady stream of aggressive incentives implies a challenging environment in which to improve U.S. profits," said Saul Rubin, an analyst at UBS Warburg, in a research note last week, who added that monthly reports suggest a weakened earnings profile.
In downgrading the debt, the agency said Ford's "profitability and cash flow remain poor."
"Ford's global automotive operations are expected to be nominally breakeven on a pretax basis in 2003, before special items. However, the year-to-year improvement over 2002 is magnified by a significant reduction in accruals for warranty and recall expenses and by the exclusion of a large charge related to further restructuring actions needed in Europe," it wrote.
S&P has BBB ratings on GM and Daimler Chrysler with a negative outlook. According to the rating group, GM has stronger automotive cash flow than Ford, which provides more confidence, and will be able to service its debt. But S&P said there was only a "subtle difference" in the Big Three ratings.