Ford returns to investment grade rating after 6 years in junk

April 24 (Bloomberg) -- Fitch Ratings raised Ford Motor Co.’s credit rating to investment grade today, ending six years of so-called junk status for the second-largest U.S. automaker.

Fitch lifted Ford to BBB-, the first level of investment grade, from BB+, the ratings company said in a statement. Fitch first cut Ford’s rating below investment grade Dec. 19, 2005, as rising fuel prices began curtailing sales of sport-utility vehicles and pickups that accounted for most of the automaker’s profit.

Returning to investment grade with Fitch and other ratings companies is one of Chief Executive Officer Alan Mulally’s goals. That would reduce Ford’s borrowing costs and permit it to recover collateral, including the company’s blue oval logo, used to obtain financing that enabled Ford to avoid bankruptcy.

“The upgrade of Ford’s ratings reflects the automaker’s significantly improved financial performance, balance sheet repair, and product portfolio improvement that have taken place over the past several years,” Fitch said in the statement. “Since the last recession, Ford’s management has been heavily focused on increasing profitability, growing liquidity, lowering debt and reducing the company’s pension obligations.”

Fitch raised the issuer default rating of Ford and its finance unit, Ford Motor Credit, said the outlook for both was stable.

The move is “an important proof point of the continued progress” at the automaker, Bob Shanks, Ford’s chief financial officer, said in a statement. The company plans on “achieving strong investment grade ratings and maintaining investment grade throughout an economic cycle.”

Profitability Streak

Ford’s ended 2011 with its 11th consecutive profitable quarter, with fourth-quarter net income of $13.6 billion, or $3.40 a share, compared with $190 million, or 5 cents, a year earlier. Ford earned $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008.

Ford resumed paying a dividend last month following a five- year suspension. The automaker March 14 declared a second- quarter dividend of 5 cents a share payable June 1 to shareholders of record on May 2.

“This is just the natural next step for the company,” said Jody Lurie, a credit analyst at Janney Montgomery Scott LLC in Philadelphia. “The debt markets are pretty much seeing investment grade and have factored this in already.” investment grade.

‘Rallying Cry’

Credit-default swaps on Dearborn, Michigan-based Ford fell 25 basis points to 280 basis points as of 8:32 a.m. in New York, according to broker Phoenix Partners Group. That’s the biggest decline since Nov. 30 and the lowest level since April 6, according to prices compiled by Bloomberg. Ford rose 1.3% to $11.50 at 10:04 a.m. New York time.

Ford borrowed $23.4 billion in late 2006 by putting up all major assets as collateral. That helped the automaker avoid the bailouts and bankruptcies that befell the predecessors of General Motors Co. and Chrysler Group LLC in 2009.

To recover that collateral, Ford must receive an investment-grade credit rating from two major rating companies.

“Getting the collateral back, getting the blue oval back has been a huge rallying cry and one that we all feel emotionally connected to,” Neil Schloss, Ford’s treasurer, told reporters March 15. “Investment-grade companies feel better about themselves.”

Standard & Poor’s rates Ford BB+ and Moody’s Investor Service rates the automaker Ba1, each is one level below investment grade.

Borrowing Costs

The credit upgrade “does help improve their borrowing costs by lowering interest rates,” said Efraim Levy, equity analyst with Standard & Poor’s Capital IQ in New York.

CEO Mulally, turned around the automaker by globalizing operations, cutting costs, improving quality and expanding the lineup with fuel-efficient models such as the Fiesta subcompact.

Ford is “in a solid position to withstand the significant cyclical and secular pressures faced by the global auto industry,” Fitch said. The automaker faces risks including “ongoing uncertainty regarding the strength and pace of the global economic recovery, and the durability of global auto demand.”

Bloomberg News

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