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Updated from 12:31 p.m. EDT

Moody's cut



long-term credit rating Thursday to Baa3, its lowest investment-grade rating. The move was a near-term victory for Ford investors, who worried the agency would follow Standard & Poor's in lowering the bonds to junk.

Moody's cut Ford Motor Credit to Baa2 from A3. In all, about $175 billion of debt is affected.

"The downgrade of Ford's ratings recognizes that the company will fall significantly short of the benchmarks identified by Moody's during October 2004," the agency said. Those include turning $4 billion in 2006 pretax automotive profit, stabilizing its North American market share above 19.5%, and "remaining on track for delivering more robust credit metrics in 2006 and beyond."

Also on Thursday, Ford CEO Bill Ford told shareholders at the annual meeting that he will forego all compensation until the company's automotive unit is sustaining profitability, according to wire reports. He didn't set any specific earnings targets, but said the company would have to do better than this year's expectations for a breakeven performance.

Ford, the grandson of the company's founder, Henry Ford, received compensation worth about $22 million in 2004.

Moody's said Ford faces numerous threats, including the need to sustain profitable market share despite a shift in North American consumer demand away from high-margin trucks and sport utility vehicles to smaller crossover vehicles. It also cited an elevated cost structure due to excess production capacity, persistently high healthcare costs, rising prices for commodities such as steel and resins, and the need to restructure its supplier and former subsidiary,




Ford's shares were recently down 24 cents to $9.40. The 2.5% fall represented a slight bounce from Thursday morning, when Ford suspended sales of commercial paper in anticipation of the Moody's action.

Chris Garman, high-yield bond strategist with Merrill Lynch, said Moody's downgrade of Ford would have less impact in financial markets than S&P's did.

"The fact that these guys are looking at downgrades has been fairly clear to everyone for some time, but the timing was certainly accelerated in the case of S&P," Garman said.

Garman noted that both Ford and GM are trading at a higher spread over Treasury notes than most junk credit issues. "The market is really assigning these guys the credit risk of a low, single B-rated credit," he said.

Both Ford and

General Motors


were cut to junk status last week by Standard & Poor's, which argued that neither is responding well to competitive threats, particularly falling profitability in sports utility vehicles.

Moody's characterization of Ford's prospects was less severe.

"Notwithstanding these challenges, Moody's recognizes that Ford has continued to make progress in key financial and operational areas," the agency said. "Ford has exceeded the cost reduction targets established as part of its 2002 revitalization plan, the new product introduction phase of the revitalization initiative is proceeding as planned and will continue into 2006, and the company is improving its position in the CUV segment."

Moody's also said Ford's liquidity remains "very strong" with $23 billion in cash and short-term balances, a position that could be enhanced if the company sells Hertz.

"This underscores the fact that these two major credit rating agencies differ on their view of Ford's prospects," said Marty Fridson, publisher of high-yield newsletter

Leverage World

. "In a perverse way, this downgrade was a vote of confidence. We'll see if Fitch comes in next with a downgrade or not."