Downgrades by Moody’s and S&P Global stripped Ford of its investment-grade credit rating on Wednesday, a week after the carmaker shuttered most global plants, sending $36bn of its debt tumbling into the junk bond market.
The move comes after regulators and investors warned about the risks of large amounts of debt falling down the ratings ladder, potentially causing turmoil as investors bound by strict requirements to only hold higher-rated debt are forced to sell.
Ford was “borderline” for an investment-grade rating even before the coronavirus pandemic, S&P Global Ratings said on Wednesday. A high cash burn from closed factories, while industry light-vehicle sales are forecast to fall by up to 10 per cent in China and up to 20 per cent in the US and Europe, relegates the Detroit automaker’s rating to double-B plus, one notch into junk territory, it said.
Moody’s already rated Ford as junk and downgraded the carmaker by another notch on Wednesday, meaning the average of the company’s four public ratings was now below investment grade.
Its debt load is the largest of any recent “fallen angel” — a term given to companies that lose their coveted investment-grade credit rating — making this the largest such downgrade since 2005, when both Ford and General Motors were cut to junk.
Analysts have warned that the $1.2tn junk bond market will find it hard to digest Ford’s debt. The market for investment-grade corporate bonds is much bigger at $6.7tn.
The carmaker’s demotion to junk follows a string of other high-profile downgrades this year including of Kraft Heinz, Macy’s and Occidental Petroleum.
“We are in a recession and you should expect to see a large number of downgrades from investment grade into high yield,” said Hans Mikkelsen, a credit strategist at Bank of America, who anticipates $200bn in fallen angel bonds. “But are there many other issuers the size of Ford Motor that will get downgraded? No.”
Ford has struggled even before the downturn precipitated by the pandemic. A turnround effort launched by chief executive Joe Hackett has not yielded results as quickly as investors wished.
Now both demand and supply is being hurt by the spread of coronavirus. The company has closed plants in North and South America and Europe to protect production workers, and customers are staying away from showrooms as governments issue stay-at-home orders.
The group tapped its $15.4bn credit line last week to shore up finances and scrapped its long-protected dividend to save $600m a quarter.
Ford’s bonds had already sold off heavily in the corporate bond market rout this month as the spread of coronavirus led investors to expect the downgrade. A $1.5bn bond maturing in 2026 sank from more than 100 cents on the dollar at the start of March to just 77 cents on Wednesday, giving it a yield of more than 9 per cent, well above the average 8.3 per cent for double-B rated debt.
Hours before Wednesday’s Ford announcement, Moody’s put seven European carmakers on downgrade watch, including Daimler, Volkswagen and Renault, while also downgrading BMW’s debt from A2 from A1.
“The auto sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment,” said the report from the rating agency.
“The companies remain vulnerable to the outbreak continuing to spread.”