As a Result of Ford's Return to Investment-grade Status, About $67 Billion Has Been Pulled Out of Junk Bonds

Ford Motor Co.'s return to the investment-grade market has led to a significant withdrawal of funds from the high-yield market in just one day.

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In total, approximately $67 billion worth of Ford Motor's existing bonds have now attained investment-grade status, as reported by data solutions provider BondCliQ Media Services. This development follows S&P Global Ratings' decision to upgrade Ford Motor Co.'s credit rating to BBB- on Monday, effectively restoring its investment-grade status after it had been downgraded to junk in 2020. It's worth noting that Ford Credit, the company's financial division, was not included in this upgrade.

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Fitch had previously reinstated its investment-grade rating for Ford back in September, while Moody's continues to classify it as speculative grade. To fully regain its investment-grade status, the company requires at least two of the three major ratings agencies to grant it such a designation.

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S&P's upgrade occurred shortly after Ford reported weaker-than-expected quarterly earnings and uncertainties surrounding its recent deal with the UAW, which caught investors off guard. The company's electric vehicle (EV) business incurred an adjusted loss of $1.3 billion, surpassing Wall Street's expectations, as it pointed out that consumers interested in EVs were hesitant to pay the premium prices. Consequently, Ford postponed several long-term investments in EVs due to this mismatch in consumer demand.

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S&P expressed confidence that Ford's EBITDA margins would exceed its 8% target, and the company would have a sufficient cushion in 2024 and 2025, owing to the strong performance of its commercial vehicle franchise and gradual cost reductions. The rating agency also highlighted Ford's cash balance of approximately $29 billion as of September 30, and liquidity of about $51 billion, which provides it with ample flexibility to compete in various markets.

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This upgrade is significant for Ford as it expands its investor base and augments demand for investment-grade bonds. However, the company still faces risks associated with economic cycles, fundamental challenges in the EV market, and uncertainties about the 2024 earnings due to labor contract issues.

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Ford and its rival, General Motors Co., now confront the challenge of allocating their resources strategically, considering the substantial increases in their UAW-related expenses. This includes making decisions regarding dividend policies and share buybacks in the context of their evolving priorities, especially concerning EVs and the influence of the UAW.

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Regarding the impact on the U.S. high-yield market, Ford's transformation into an investment-grade issuer is seen more as an index adjustment rather than a significant force affecting the core high-yield market. Nevertheless, some investment funds constrained by index guidelines will need to rebalance their portfolios in light of Ford's shift.

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The chart below illustrates Ford's debt maturity schedule, showing that the company has a substantial amount of debt maturing in the coming years, peaking at approximately $14 billion in 2026. With its new investment-grade status, Ford can now refinance this debt at more favorable rates and access deeper pools of capital.

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Meanwhile, Ford's stock experienced a 1.2% increase on Wednesday, but it has declined by 15% year-to-date, in contrast to the S&P 500's 9% gain.

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