Ford Motor Company (NYSE:F) has lost its investment-grade status. Standard & Poor's cut Ford's credit rating to BB+, one step below investment-grade, on concerns that the shutdown of its North American factories will hurt Ford's margins and cash flow for an extended period.
Ford's return to investment-grade status in 2012, following the 2008-2009 economic crisis, was a hard-won goal for the company. It was rightly celebrated at the time. But with this downgrade, 2 of the 3 major credit-rating agencies now rate Ford below the BBB level -- meaning that the company's credit rating is now, technically speaking, junk.
Here's what we know, and what it might mean.
What S&P said about Ford's credit rating
In a short note released after the markets closed on Wednesday, S&P said that the coronavirus pandemic added to its existing concerns about Ford.
The decision to downgrade Ford Motor Co. investment grade to speculative grade reflects that the company's credit metrics and competitive position became borderline for the investment-grade rating prior to the coronavirus outbreak, and the expected downturn in light-vehicle demand made it unlikely that Ford would maintain the required metrics.
S&P said that the current rating has "negative implications," meaning that there's at least a 50% chance that it could lower Ford's rating further at some point in the near future. S&P's analysts are waiting to see how long Ford's factories will be shut down, and how severely demand for light vehicles will be impacted once they restart.
A quick primer on corporate credit ratings
There are three major agencies that rate corporate credit: S&P, Moody's Investors Service, and Fitch Ratings. If two out of the three rate a company's credit below the BBB level (or equivalent), the company's debt is considered "speculative," rather than "investment grade."
The implications are simple: The lower a company's credit rating, the more it will have to pay (in interest) to borrow money.
"Junk bond" is Wall Street's slang term for bonds with a speculative credit rating. It's most often used to refer to debt issued by companies with very low credit ratings (in the Cs, rather than the Bs), but it can apply to anything in the "speculative" range.
S&P's move follows cuts to Ford's rating by Moody's and Fitch
S&P isn't the first to downgrade Ford -- in fact, it's the third.
Fitch Ratings downgraded Ford to BBB-, the very lowest level that's still considered investment-grade, in a note on Tuesday (March 24) that reflected the analysts' concerns about what could happen after the pandemic subsides:
Fitch currently believes the company has the financial flexibility to manage through an extended shutdown of its facilities, but concerns are increasing that a combination of an extended shutdown followed by weak demand in a global recessionary environment could further pressure the company's credit profile.
Like S&P, Fitch warned that it could cut Ford's rating further, depending on how things unfold over the next few months.
Moody's, meanwhile, cut Ford's credit rating to speculative levels last fall. In a note released on September 9, Moody's said that it had become concerned that CEO Jim Hackett's extensive restructuring of the company (what Ford calls a "redesign") is likely to cost billions of dollars just as the global new-car market appeared to be softening.
Remember, this was in September of 2019:
[T]he erosion in Ford's performance has occurred during a period in which global automotive conditions have been fairly healthy. Ford now faces the challenge of addressing these operational problems as demand in major markets is softening, and as the auto industry is contending with an unprecedented pace of change relating to vehicle electrification, autonomous driving, ride sharing, and increasingly burdensome emission regulations.
One of Moody's concerns at the time was that the economic waters were likely to get choppier before Ford's redesign was completed. I think we can say that they were right.
What does it mean for Ford investors?
I know that this is a disappointment for Ford's executives and employees. But for auto investors, I'm not sure it matters a whole lot right now. It's not really a surprise to hear at this moment that Ford (and every other automaker outside China) is going to have a tough time until the coronavirus pandemic subsides -- and depending on the condition of the economies in North America and Europe when it does, possibly for quite a while after.
This development means that Ford will have to pay more to borrow money, whether via credit lines or debt issues. But right now, that seems like a small drop in a very large bucket: The moves that Ford makes in the coming days and weeks to cut costs and restart its factories will matter much more to investors over the next little while.