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

November 2, 2023
minute read

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Valentyna Semerenko
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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