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Why Bankruptcy Is a Forgone Conclusion for Ford Motor Company

Last Updated September 23, 2020 1:32 PM
Ayush Singh
Last Updated September 23, 2020 1:32 PM
  • Ford’s credit rating is inches away from being downgraded to ‘junk’ by either S&P or Fitch. This will trigger a covenant in their long-term debt, which will adversely affect its ability to borrow more money.
  • After the company committed billions to ambitious restructuring plans, it’s very low on cash and drowning in debt.
  • Amid declining sales across all major markets, the company could go belly up much sooner than anticipated.

Ford Motor Company (NYSE:F) has been in a downward spiral since their talisman CEO Alan Mulally resigned in 2014. Earlier in my assessment of Ford, I mentioned how the next global recession would be the undoing of the company. But several other threats can push Ford into bankruptcy much sooner.

Ford’s Debt Will Get Downgraded

In September 2019, Moody’s delivered a major blow  to the automotive giant by downgrading its credit rating to ‘junk’. The S&P followed suit and downgraded  Ford’s debt to BBB-, just a notch above junk.

The news was not well-received by the markets, as Ford’s long-term debt has covenants that trigger when two out of four rating agencies deem it junk. The covenants, if triggered, will make it difficult for Ford to obtain funding in the future.

Ford's covenants
The covenants will likely get triggered soon. | Source: Form 10-Q 

If S&P decides to go another notch lower, it could spell a major disaster for Ford and may even push the carmaker into bankruptcy. Increasing competition, declining market share in key markets and weaker demand in the auto sector could push Ford into free fall.

In a report last year, S&P claimed it’s unlikely to downgrade Ford at the time :

A two-notch downgrade to a speculative-grade rating is unlikely over the next 24 months unless a higher risk of a US recession coincides with a lack of profitability improvements in Europe and China, which — together — would reduce the cash cushion Ford would need to withstand the next downturn.

The risks that S&P mentioned in the report are coming to fruition, and a downgrade looks highly likely.

Cash Crunch Will Get Worse

Jim Hackett, Ford’s CEO, committed $11 billion in a bid to revive  the company. Despite these plans, investors have been losing patience as their earnings continue to be depressed because of losses incurred in China .

Moody’s didn’t buy into Ford’s story either as it downgraded the debt anyway, citing doubts about the company’s restructuring plans.

To make matters worse, conditions in China don’t seem to be improving. The auto slump is hurting all American car makers, as even General Motors reported a 15% sales drop in 2019. 

Ford's underperformance as compared to peers
Ford was the worst-hit during the auto-industry slump. | Source: The Motley Fool 

With the outbreak of coronavirus expected to impact the Chinese economy negatively, Ford is in for a rude awakening in the world’s fastest-growing car market.  Given the lack of profitability in China, a debt-downgrade looks like a forgone conclusion at this point.

Ford is already drowning in debt, and the inability to borrow more money could be the final nail in the coffin.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.