Fitch Gives Ford Positive Outlook

CHICAGO & NEW YORK-- Fitch Ratings assigned a 'CC/RR6' rating to Ford Motor Company's issuance of $2.875 billion seven-year senior unsecured convertible notes, a positive ratings outlook.

The Positive Outlook reflects the better-than-expected progress on Ford's cost reduction program, production and inventory discipline that has resulted in solid pricing performance and continued market share gains. Although Fitch expects a weak rebound in industry sales in 2010, Fitch expects that cash drains will be materially reduced and comfortably within Ford's liquidity position.

Fitch expects that industry sales will show only modest improvement in 2010, based on macroeconomic factors, including increased unemployment, reduced wealth, consumer spending pressures and a higher savings rate. Other factors muting a rebound in industry sales include more limited financing capacity, potential increases in gas prices and evolving consumer thinking that may stretch average vehicle age. Nevertheless, the combination of Ford's cost reduction efforts and price performance has led to sharply reduced cash drains in a trough environment.

Fitch expects that even if U.S. industry sales were to remain flat at roughly 10.5 million vehicles in 2010, Ford's cash drain would be less than $5 billion. As U.S. industry sales climb above an 11.5 SAAR rate, Ford should be able to achieve positive free cash flow. Although cost reductions should continue to be realized through fourth-quarter-2010, the step change in fixed cost reductions have largely been completed, and margin expansion going forward will need to be derived primarily from capacity utilization and scale efficiencies associated with increases in industry volumes. The recent contract talks demonstrate, however, that full labor-cost parity may still be a challenge.

A Fitch upgrade of Ford would be driven by a combination of the following:

-- Industry sales rebound to an annual 12 million sales level more quickly than currently forecast;

-- Ford's products continue to hold or gain share;

-- Inventory management at Ford and the industry allows Ford to hold or improve product prices;

-- A clear path to positive free cash flow is projected;

-- Liabilities continue to be managed or addressed, including the maturity of the company's bank agreement;

-- Independent access to capital by Ford Credit improves.

An Outlook revision back to stable or a ratings downgrade could result from some combination of the following factors:

-- U.S. industry sales revert to new lows versus 2009 levels in the event of a double-dip recession;

-- A market disruption in oil prices which sends gas prices sharply higher and drives consumers away from vehicle purchases;

-- A breakdown in the supply chain resulting from further supplier bankruptcies and lack of access to capital, or from dislocations caused by the dissolution of a major competitor;

-- Inability of Ford Credit to obtain financing on competitive terms.

Ford is currently riding a wave of consumer goodwill resulting from its ability to avoid a direct government rescue and from favorable quality reports. Product winnowing and capacity reductions at GM and Chrysler indicate that several points of U.S. market share may be up for grabs over the next several years, with Ford in a good position to capture a portion of it. Ford's competitive product lineup across market segments, a good recent history of product introductions, and a rapid cadence of new products and refreshenings indicate that recent share gains could persist.

Ford's liquidity position remains adequate to finance dramatically reduced negative cash flows, even if they persist through 2010. Even in the weak industry recovery forecast by Fitch, Ford should be able to sustain liquidity at more than twice the minimum required level. Scheduled proceeds from the Department of Energy loans ($5.9 billion in total), contributions from Ford Credit, and working capital inflows from increased production should offset near-term operating losses persisting from weak market conditions. Ford has been able to manage its liability structure through the 2009 debt exchange and regular equity issuance.

Fitch expects that Ford will continue to tap the equity markets as conditions permit, and that Ford will issue equity to the maximum extent permitted (50%) to finance its upcoming obligations under the VEBA agreement. Fitch notes that minimal or no contributions to the company's underfunded U.S. pension obligations could create more onerous contributions at a later date given recent asset performance, but the contribution of equity for these obligations would limit the potential claim on cash over the next five years. Proceeds from Volvo are expected to be limited, and may be largely offset by retained liabilities.

Ford's cash at the end of 3Q was $23.8 billion, providing an adequate cushion in the event of persistent weakness in U.S. industry sales. The balance sheet remains burdened by debt, unfunded pensions and obligations under Ford's VEBA agreement, with only marginal improvement potential over the near term, outside of material equity issuance. Of primary concern is the December 2011 maturity of the bank agreement. Fitch expects that given Ford's operating performance and the improvement in the capital markets, Ford is in a position to address the maturity of the facility.

Fitch continues to recognize the strong linkage between the ratings of Ford Credit and Ford. In addition to the rating drivers cited for its automotive parent, continued improvement in operating performance and the ability to finance its business independent of government programs would support an upgrade for Ford Credit.