Ford’s credit rating is highly likely to be downgraded in the near future and the company may go belly up even before a recession.
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.
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.
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.
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.
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.
Last modified: September 23, 2020 1:32 PM