Fitch Downgrades Ford & Ford Credit to 'CCC'; Outlook Negative

Business Wire, Oct 6, 2008

CHICAGO -- Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Ford Motor Company (Ford) and Ford Motor Credit Company (Ford Credit) by one notch to 'CCC' from 'B-'. A full list of rating actions follows the end of the press release.

This rating action reflects the growing impact of the credit crisis on industry sales volumes, supply chain financial risks, the financial health of dealerships and the capital advantage of transplants. These issues are compounding the already-severe stresses resulting from weakening economic conditions and the migration to fuel-efficient vehicles. Plummeting sales volumes will accelerate negative cash flows in the second half of 2008 and will result in deep cash drains through 2009. Despite significant progress in Ford's cost reduction efforts and an easing of commodity price pressures, Fitch projects that without additional capital raising or asset sales, Ford will reach the minimum required operating cash levels in the second half of 2009.

Although Ford remains the best positioned among the Detroit Three in terms of liquidity, financial resources, manufacturing footprint and intermediate-term product plans, these relative attributes are being overwhelmed by industry conditions and the impact of the credit crisis. Fitch expects that industry volumes will not trough until 2009.

The current credit crisis has augmented a number of risk factors listed below, which apply to all the Detroit Three:

--Of primary concern is the impact of the credit crisis on the extension of credit throughout the supply chain. The decline in production among the Detroit Three, higher commodity prices and other margin pressures, and lack of access to capital is likely to produce further bankruptcies within the supply chain. The potential contraction of trade credit throughout the industry, and the critical nature of trade credit to the capital structure of the supply industry and the Detroit Three, poses a high degree of risk in the event that capital market conditions continue to contract;

--Industry volumes will continue to ratchet down through at least 1H'09 due to the decreasing ability of retail consumers to obtain competitive financing from the financing arms of the manufacturers or from third-party lenders. This adds to the impact of the pullback in leasing on sales and production volumes;

--The asset-backed securities (ABS) market has become constricted, in terms of availability and pricing, for both auto loans and floorplan receivables;

--Operating and financial stresses at dealerships continue to escalate, impacting their ability to hold inventory and to push sales volumes. Challenges include the higher cost and reduced availability of floor-plan financing, more limited retail financing capabilities, and an increasing number of bankruptcies;

--The ability of the Detroit Three to access the capital markets, a component of earlier plans to maintain liquidity, is currently severely limited. By the same token, asset divestitures are expected to be very challenging to complete, with sales proceeds unlikely to meet previous expectations or to sustain liquidity;

--The combination of a wide margin advantage and superior capital resources provide the transplants with an overwhelming competitive advantage during the current cycle. Toyota's announcement that it will be offering 0% financing across eleven of its models is a crippling competitive tool in the current environment which will further impact volumes and pricing of the Detroit Three;

--A bankruptcy filing by a major competitor would further affect pricing and the financial risks of the supply chain, and could force other manufacturers to follow.

Ford's cash position at the end of the second quarter was approximately $26.6 billion. In the absence of further capital-raising, Ford's liquidity could decline to the minimum required level of $10-to-12 billion within the next eighteen months. Potential sources of liquidity include the federal loan guarantee program, renegotiation of the VEBA financing structure and timetable, and very modest levels of external capital and asset sales. Fitch expects that Ford will benefit from a federal loan guarantee program, although the timing, amount, structure, term and pricing are uncertain.

Ford retains access to its $11.5 billion revolver but the total commitment has been reduced by the bankruptcy of Lehman Brothers, which had an $890 million commitment. The revolver is not subject to restrictive covenants, but contains a borrowing base which Fitch expects could further limit availability over the near term. Although Fitch expects a modest level of capital-raising will be completed, including the federal government loan program, cash drains through 2010 will limit the potential to boost liquidity to comfortable levels. Ford has been active in equity for debt exchanges, which has helped the company manage its debt levels and near-term refinancing requirements, but which has not materially sustained liquidity. Ford's underfunded pension position will grow as a result of declines in the equity and fixed-income markets, but does not pose a material near-term funding risk.