How Ford's Credit Upgrade Helps Shareholders
Soon after the opening, shares were trading at $10.41, up 22 cents. While the upgradeto investment grade by Moody's surprised no one, the symbolism of Ford's reclaiming its blue oval trademark, which it had hocked, was compelling.
"That an auto company can be upgraded to investment grade in today's choppy macro backdrop only supports our view that 'new auto' fundamentals have indeed been established since the 2008-09 downturn," wrote Citigroup auto analyst Itay Michaeli, in a report issued Wednesday. Michaeli has a target price of $15 for Ford, his top pick.
Among the positive implications from the upgrade, Michaeli wrote, are these: Ford can release collateral and "now possesses a largely unencumbered balance sheet," and Ford now has "greater long-term financial and funding flexibility, particularly at Ford Motor Credit." Also, the upgrade is an important vote of confidence: "Remember that credit ratings are meant to last through an economic cycle," Michaeli wrote. Long-term, he noted, the upgrade could lead to more shareholder-friendly cash deployment, although nothing imminent is expected.
On a conference call with reporters late Tuesday, Ford Chief Financial Officer Bob Shanks said the company will see a reduction in its borrowing rate and its bonds can be included in institutional indices, meaning broader participation by bond buyers.
On Wednesday, traders also had to consider that Ford derives 25% of its global revenue from troubled Europe, which perhaps weighed on shares.
However, in other positive news for the auto industry, Moody's also commented Tuesday on GM's (GM) rating, reaffirming a Ba1 and a positive outlook.
"GM's credit quality continues to improve and the company remains on track to regain an investment grade credit rating over the course of the next 12 months," said Bruce Clark, Moody's lead auto analyst, in a prepared statement.