Fitch Comments on Ford's Ratings

CHICAGO & NEW YORK--(BUSINESS WIRE)--Fitch has not taken a rating action on Ford Motor Company and Ford Motor Credit Co. LLC (Ford Credit), but will be reviewing the existing ratings over the next six weeks. Although Ford is viewed as having more than adequate liquidity and resources to weather current conditions through 2009, unrelenting industry and economic pressures make it increasingly likely that Ford will be unable to maintain its existing ratings. A key determinant in the review will be the performance of Ford Credit.

Among the domestic manufacturers, Ford is the most reliant on the U.S. pickup truck market, which has seen steep declines due to weak economic conditions in the homebuilding market and soaring gas prices. Industry pickup sales have declined well outside a range that could be explained by cyclical fluctuations, confirming that a permanent market shift away from pickup trucks has taken place. Ford has been aggressive in addressing overcapacity in the pickup and SUV segments over the last several years, but has been unable to stay ahead of a rapidly deteriorating market. Fitch expects that there is some pent-up demand accruing in the pickup market, although a rebound is now expected to be more muted and more distant than expected, and may not occur until 2010.

Ford's lineup at the lower end of the product spectrum, the Escape, Fusion and Focus, as well as the Edge crossover, have held up relatively well in the current environment, providing Ford with the best product balance among the domestic manufacturers over the intermediate term. The most recent surge in gas prices and the corresponding shift in consumer preferences has required an acceleration of restructuring efforts, and shortened the timeline over which the domestic manufacturers are required to transform their product lineups and manufacturing footprint in line with market demand. Commodity prices have continued to be a stronger headwind than anticipated, and higher steel costs will now be contracted in for the next several years. Recouping these cost increases through pricing will be required over the long-term, but will be unlikely in the current environment.

Fitch's ongoing assessment of Ford and Ford Credit will focus on expected cash drains through 2009 and the performance of Ford Credit. Ford's current cash cushion is expected to leave the company with more than adequate liquidity through 2009, keeping the company above a minimum comfort level of approximately $10 - 11 billion. Incremental asset sales and financing are expected over the near term to supplement existing liquidity. Ford has been opportunistic in using equity-for-debt swaps in muting the growth in debt. It should also be noted that a portion of the cash drain in 2008 is associated with the cash funding of the recent UAW healthcare agreement, as opposed to issuing new short-term debt. In 2010, Ford will begin to realize the benefits of this VEBA agreement, and could also benefit from a rebound in economic conditions.

A primary focus of the review will be on Ford Credit and continued access to cost-effective financing, either through the securitization market or other sources. To date, Ford Credit's underwriting standards have been consistent, and loss experience has been in line with expectations given the economic cycle. However, with the unsettled capital markets (and the asset-backed securities market in particular), the steep decline in pickup and SUV residuals, extended contract terms and a weakened consumer, underlying performance has weakened and may diminish investor appetite for auto loans at economically sustainable terms. In the event that the financing markets are expected to be less accommodative over the near-to-intermediate term, Fitch could potentially lower the IDR to 'CCC'.

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