Ford downgrades plunge its $36bn of debt into junk market

Downgrades by Moody’s and S&P Global deprived Ford of its premium credit rating on Wednesday, a week after the automaker closed most factories in the world, sending $ 36 billion in debt plummeting to the bond market. junk.

The move comes after regulators and investors have warned of the risk of large amounts of debt falling in the rating scale, which could cause turbulence, as investors held by strict requirements to hold only better rated debts are forced to sell.

Ford was “cut off” for investment grade ratings even before the coronavirus pandemic, S&P Global Ratings said on Wednesday. Heavy consumption of liquidity from closed factories, while sales of light vehicles in the industry are expected to fall by up to 10% in China and up to 20% in the United States and Europe, the automaker notes of Detroit double B plus, a notch in unwanted territory, he said.

Moody’s previously classified Ford as junk and lowered the automaker by another notch on Wednesday, which means the company’s average of four public ratings was now below investment grade.

Its debt load is the largest of all recent “fallen angels” – a term given to companies losing their investment grade credit ratings – making it the most severe deterioration of its kind since 2005, when Ford and General Motors been put in the trash.

Analysts have warned that the $ 1.2 billion bond market will have trouble assimilating Ford’s debt. The premium corporate bond market is much larger, at $ 6.7 billion.

The automaker’s demotion to the junk follows a series of other high-level downgrades this year, including Kraft Heinz, Macy’s and Occidental Petroleum.

“We are in a recession and you should expect to see a lot of downgrades from the high-yield investment category,” said Hans Mikkelsen, credit strategist at Bank of America, which forecasts $ 200 billion in fallen angel bonds . “But are there many other transmitters the size of Ford Motor that will be downgraded?” No.”

Ford struggled even before the pandemic slowdown. A recovery effort launched by CEO Joe Hackett has not produced results as quickly as investors hoped.

Today, supply and demand are affected by the spread of the coronavirus. The company has closed factories in North and South America and Europe to protect production workers, and customers stay away from showrooms while governments issue home orders.

The group used its $ 15.4 billion line of credit last week to consolidate its finances and abandoned its long-term protected dividend to save $ 600 million per quarter.

Ford bonds had already sold massively in the corporate bond market rout this month, with the spread of the coronavirus prompting investors to expect the downgrade. A $ 1.5 billion bond maturing in 2026 fell more than 100 cents on the dollar in early March to just 77 cents on Wednesday, giving it a return of more than 9%, well above average. 8.3% for double B rated debt.

Hours before Ford’s announcement on Wednesday, Moody’s put seven European automakers under surveillance, including Daimler, Volkswagen and Renault, while reducing BMW’s debt from A2 to A1.

“The automotive sector was one of the sectors most affected by the shock given its sensitivity to demand and consumer sentiment,” said the report from the rating agency.

“Businesses remain vulnerable to the epidemic which continues to spread.”

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