Oh, well done, well done

Ford’s Debt Will Get Downgraded

In September 2019, Moody’s delivered a major blow to the automotive giant by downgrading its credit rating to ‘junk’. The S&P followed suit and downgraded Ford’s debt to BBB-, just a notch above junk.

The news was not well-received by the markets, as Ford’s long-term debt has covenants that trigger when two out of four rating agencies deem it junk. The covenants, if triggered, will make it difficult for Ford to obtain funding in the future.

Ford's covenants
The covenants will likely get triggered soon. | Source: Form 10-Q

Me, I read that as saying that Ford’s debt is free of credit rating triggers. But then whaddaIknow?

3 thoughts on “Oh, well done, well done”

  1. It looks as if you might not be understanding the text. The wording in the accounts says that if 2 rating agencies downgrade then guarantees from subsidiaries will be required to keep the debt from going into default. Those guarantees might not be easy to come by, I imagine, in the current scenario

  2. @Tim W

    This from 10-Q

    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

    The corporate credit facility is unsecured and free of material adverse change conditions to borrowing, restrictive
    financial covenants
    (for example, interest or fixed charge coverage ratio, debt-to-equity ratio, and minimum net worth
    requirements), and credit rating triggers that could limit our ability to obtain funding.

    The corporate credit facility contains a liquidity covenant that requires us to maintain a minimum of $4 billion in aggregate of domestic cash, cash equivalents, and loaned and marketable securities and/or availability under the facility. If our senior, unsecured, long-term debt does not maintain at least two investment grade ratings from Fitch, Moody’s, and S&P, the guarantees of certain subsidiaries will be required.

    I agree with your view. Reads like “Dear Ford, Cashflow is important”

  3. Those guarantees might not be easy to come by, I imagine, in the current scenario

    In my experience (granted, not at the scale of Ford Motor) you don’t give up a covenant like that if it will be at all difficult to provide: most likely the required guarantees will be from wholly-owned subs, in which case they can be had easily, or there will be a prior agreement between the subsidiary and Ford to provide the stipulated form of guarantee on demand. All the guarantee does is simplifies the cash grab by the lenders without the necessity of taking over (say) Ford Australia if things go pear-shaped, and Ford decides to play silly-buggers.

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