Ford Motor Co. nearly collapsed when the bubble burst on the U.S. automotive industry, and the automaker carried the scar of a junk status credit rating to prove it. The Associated Press reports that Ford may have healed. Fitch Ratings agency lifted Ford’s junk status Tuesday, replacing it with a designation of investment grade.
Ford’s recovery almost complete
In order for Ford’s economic recovery to be complete, the company needs another major corporate credit rating agency such as Standard & Poor’s or Moody’s to follow Fitch’s lead. Once that occurs, Ford will be given back the rights to its blue oval logo, as well as control of factories and other assets that are currently in hock.
Lost investment status in 2005
Ford lost investment grade status in 2005, according to Reuters. At the time, the company was losing billions of dollars on SUV and truck production during a time when sales had already gone bust. In order to remain ahead of the wolves, Ford mortgaged most of its assets in order to borrow $23.5 billion. This enabled the automaker to revamp its vehicle lineup and remain a step ahead of bankruptcy without accepting automotive bailout money from taxpayers.
Understanding Ford’s credit rating
In general terms, a company that merits an investment status grade is a low risk to default on its debt, and hence a more trustworthy, worthwhile investment for stock speculators. On the flip side of the coin, junk status indicates poor quality of credit. Companies with a junk status rating pay much higher interest rates on debt and can charge almost nothing for bond sales.
Fitch Ratings upped Ford from “BB plus” to “BBB minus” on Tuesday. The reasoning behind the upgrade, as a Fitch spokesperson noted, is that Ford’s recovery efforts “have put the company in a solid position to withstand the significant cyclical and secular pressures faced by the global auto industry.” This means that the company has greater financial flexibility and tools at its disposal. With the $10 billion in net cash that Ford had at the end of fiscal 2011, Fitch is confident that Ford can weather future financial storms, should they occur.
Turning things around
In 2006, former Boeing executive Alan Mulally has hired to serve as the CEO of Ford Motor Co. Mulally, who organized the $23.5 billion loan, called it the “giant home improvement loan” Ford needed to restructure for future prosperity. While plants closed, brands were jettisoned and workforce was slashed by one-third, Ford was able to return to great profitability. Over the past three years, the automaker has reportedly enjoyed billions of dollars in profit.
Last month, Ford was able to resume paying shareholders for the first time since September 2006.
Shares are up
Tuesday morning trading saw Ford Motor Co.’s share price up 19 cents (1.7 percent) to $11.54 per share. Over the past 52 weeks, Ford’s share price has ranged from $9.05 to $16.18.