By Jonathan Stempel
NEW YORK, Oct 25 (Reuters) - Standard & Poor's on Friday cut Ford Motor Co.'s long-term debt ratings to two notches above "junk" status, on concern the world's No. 2 automaker's restructuring plan might not result in sustained profits.
S&P's outlook for Ford is "negative," meaning another cut for Ford and its Ford Motor Credit Co. finance arm is more likely than an upgrade. Ford had $162 billion of overall debt as of Sept. 30, S&P said, and is the biggest bond issuer in Lehman Brothers Inc.'s benchmark U.S. Credit Index.
The downgrade might boost the automaker's borrowing costs as Chief Executive Bill Ford cuts jobs and closes plants as part of the company's nine-month-old turnaround plan. Bill Ford met with investors this week to reassure them about Ford's plans, and on Monday called for another $1 billion of cost cuts, on top of at least $6 billion previously announced.
"They are going to be challenged and vehicle sales may slow," said Domenick Fumai, a BNP Paribas analyst who rates Ford bonds "hold" and does not own them. "Most of Ford's goals appear to be on or close to track though a significant decline in the economy would hurt. Investors have reason for concern, but Ford is not likely to go belly-up."
S&P cut the long-term ratings of Ford and Ford Credit one notch to "BBB," its second-lowest investment grade, from "BBB-plus." It affirmed their "A-2" short-term ratings. Last week S&P similarly cut General Motors Corp.'s long-term ratings, citing pension liabilities, with a "stable" outlook.
"Ford has to improve its cost position and beef up its product offerings," Scott Sprinzen, an S&P auto analyst, said in an interview. "The reality of the marketplace is that it has to stay competitive on pricing, which is a moving target."
Allan Gilmour, Ford's chief financial officer, said in a statement the Dearborn, Michigan-based company's restructuring is "on track." Ford lost $5.45 billion last year.
"The change in (our) credit rating does not reflect the fundamental strength of our business," Gilmour said. "We have accelerated our cost reduction efforts to eliminate waste and enhance efficiency throughout the business."
Ford shares closed Friday on the New York Stock Exchange at $8.72, down 14 cents. They have fallen 45 percent this year.
PENSION LOSSES
Last week Ford posted a $326 million third-quarter net loss and said falling stocks had doubled its U.S. pension fund's underfunded status, to $6.5 billion from $3.2 billion a quarter earlier. Overall pension liability tops $10 billion, S&P said.
"Pension liabilities are a major factor in our downgrade," said Sprinzen. He said the new rating reflects Ford's long-term need "to devote significant resources to its pension fund."
Ford wants to post $7 billion in annual pretax profits by 2005. S&P said it may cut Ford again if it doubts the automaker will show sustained earnings improvement, and break even in its auto operations outside Ford Credit, in 2003.
Many analysts expected the Ford downgrade.
"I was not at all surprised," said Steven Bocamazo, vice president in fixed-income research at Loomis, Sayles & Co. in Boston, who does not own Ford bonds. "Ford has offered generous incentives to move its products, and people are concerned that consumers may soon be fatigued of these incentives, or the economy may keep people from making big-ticket purchases."
Ford is losing market share to GM. Ford's 2002 U.S. car and truck sales through September totaled 2.6 million vehicles, down 6.8 percent from a year earlier. GM's sales rose 2.1 percent, while U.S. sales overall rose 1.2 percent.
Weak October figures, due Nov. 1, might prove a catalyst for a downgrade from Moody's Investors Service, Merrill Lynch & Co. analyst said Mary Rooney in a report.
Moody's rates Ford's and Ford Credit's senior debt "Baa1" and "A3" respectively, two notches and one notch above S&P, and their short-term debt "P-2." Its outlook is also "negative."
ZERO-PERCENT FINANCING
Ford and GM are offering interest-free financing on many vehicles. Analysts fear this might lead to a permanent "price-cutting" atmosphere that might hurt future profits.
"We got out of Ford last year when it became apparent its product mix didn't appear as strong as GM's," said Steven Jones, who oversees $800 million as director of fixed income at Missouri Valley Partners in St. Louis.
Gilmour said Ford has "manageable" pension liabilities, with no mandatory contributions due before 2006. He said Ford's auto operations have nearly $26 billion of cash, and Ford Credit has "very strong" liquidity and funding flexibility.
Ford Credit has said it plans in 2003 to issue $22 billion to $32 billion of debt, largely in the asset-backed market.
S&P's Sprinzen said it is "a concern" for a big finance operation to depend heavily on one financing source, but said the auto asset-backed sector is "a big and liquid market."
Traders said Ford Credit's 7.25 percent notes maturing in 2011 yield about 9.55 percent, or 5.45 percentage points more than 10-year U.S. Treasuries, up from 5.35 percentage points on Thursday. A rising spread means investors see more risk. (Additional reporting by Dena Aubin and Nancy Leinfuss in New York and Tom Brown and Justin Hyde in Detroit.)