Ford Rejoins the Blue Chips
May 24th 2012 7:08PM
Updated May 24th 2012 7:12PM
Now it's really official: Ford (NYS: F) has rejoined the ranks of financially healthy American companies.
When Moody's upgraded Ford's credit rating to Baa3, the lowest "investment-grade" level, late on Tuesday, it marked the final stage of the Blue Oval's storied turnaround -- a significant moment for the company and for its investors.
But wasn't Ford already upgraded?
It was indeed. Ford's credit was upgraded to investment-grade by another of the three major rating agencies, Fitch, last month. That was a pretty big deal, as I said at the time -- the first official ratification of Ford's return to financial health.
But this upgrade from Moody's was arguably more significant -- or at least more important to Ford itself: Under the terms of the 2006 loans that saved the company, Ford needed two of the three major credit-rating agencies to upgrade it to investment-grade to reclaim the collateral it had pledged. That collateral included many Ford factories, its headquarters building, and even the rights to the Blue Oval logo itself.
It may have been painful to pledge all of those assets, but the $23.5 billion that Ford borrowed turned out to be the difference between life and death (or at least, life and an ignominious government bailout) for the company. That cash reserve allowed Ford to continue to invest heavily in a global lineup of new products during the worst of the economic downturn, when rivals like General Motors (NYS: GM) and even Toyota (NYS: TM) were cutting back.
Those new products -- which included hot-selling new vehicles like the Explorer and Focus, as well as significant upgrades to the company's signature pickup trucks -- have made all of the difference for Ford, as GM and others struggle to catch up. Not only have they driven the company back to solid, sustainable profitability, especially in the U.S., but they've also put Ford at the top of many consumers' shopping lists -- in many cases, for the first time ever.
But the need to "hock the Blue Oval," as Executive Chairman Bill Ford put it, rankled many inside Ford. For them, this upgrade was a major emotional milestone -- important enough that Bill Ford used the emergency public-address system to announce it to employees at Ford's headquarters as soon as he received the news.
But what does it mean for shareholders?
Why this is important for Ford shareholders
Moody's said in a statement that it now believed that Ford would be able to "maintain an investment-grade profile" -- simply put, to keep making payments on its debts -- even though an economic downturn, and even in the face of regional problems like the economic challenges in Europe.
That's a pretty solid endorsement, one that will allow more institutional investors to own Ford's bonds. That in turn will lower the company's borrowing costs, potentially saving it hundreds of millions of dollars in interest payments every year. And it could make the stock more appealing to big investors like mutual funds, driving up the company's share price over time.
But while we can reasonably say that Ford is "turned around", the company still has work to do. CFO Bob Shanks noted on Wednesday that the company still has "nearly $4 billion to go" before it reaches its long-term goal of having only $10 billion in debt by mid-decade. Like most automakers, Ford is losing money in Europe, a situation that needs attention. And managing the need to add production capacity to meet demand for hot products without adding significantly to fixed costs could prove to be a challenge at home in North America.
But for shareholders, particularly those of us who bought Ford in the dark days of the economic crisis, this upgrade is a welcome milestone -- and, hopefully, a harbinger of strength for Ford's shares in coming months.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Moody's, Ford, and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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