Ford Rating Investment-Grade After Cut

Moody's Investors Service cut Ford Motor Co.'s (F) debt ratings Thursday but kept the company's investment-grade status a week after shrinking SUV sales prompted another agency to slash the No. 2 U.S. automaker's ratings to junk territory.

Despite the downgrade, the investment-grade ratings mean Ford's bonds could stay in some widely followed credit indexes, preventing the forced selling that could have been triggered by two junk ratings.

"It looks like Ford is safe for the time being," said Kent White, auto credit analyst at Thrivent Financial in Minneapolis. "Unless Ford's story changes dramatically, it will likely stay investment-grade until at least the end of this year."

Moody's said it was concerned about consumers' shift away from Ford's profitable trucks and SUVs, high health-care costs at the automaker and rising costs for steel and other materials.

Since the 1980s, Ford's ratings have slid from coveted "triple-A" levels as the company battled competition from global rivals and rising employee health-care costs.

Moody's cut Ford's long-term credit ratings by two notches to "Baa3," the lowest investment-grade rating. It cut Ford Motor Credit Co.'s (FCJ) (FCZ) rating by two notches to "Baa2," the second-lowest investment-grade rating, from "A3." The outlook on the new ratings is negative, meaning another downgrade is possible over the next 12 to 18 months.

Ford said in a statement that it was "disappointed" with the Moody's downgrade.

Ford continues to lose market share to domestic rivals and Asian automakers as rising gasoline prices hurt its highly profitable truck sales.

Downgrades usually raise borrowing costs as investors demand higher yields for the risk of owning a company's bonds.

Ford's bonds weakened in volatile trading and their yields rose relative to Treasuries after the downgrade.

Yields on Ford Credit's notes with a 7 percent coupon due 2013 rose to 5.09 percentage points more than Treasuries, about 0.12 percentage point higher on the day, according to MarketAxess.

Ford and its finance arm have about $161 billion of debt, including secured notes.

"It is a mild positive for the (corporate bond) market," said Peter Farley, portfolio manager at Declaration Management & Research LLC in McLean, Virginia. "Moody's is out of the way for now."

Moody's also affirmed Ford Credit's "Prime-2" short-term rating and cut Hertz Corp.'s (search) long-term rating to "Baa3 from "Baa2." The outlook for Hertz is developing, meaning it could be raised, lowered or affirmed, reflecting a possible sale of the company by Ford, Moody's said.

Ford's rating is likely to stay at the "Baa3" level in the near term, thanks to its strong cash position, the progress it has made on its turnaround since 2002 and likely proceeds from a Hertz sale, Moody's said. Ford indicated in April that it was mulling a spin-off or sale of its Hertz rental car unit.

Fitch Ratings rates Ford and Ford Credit "BBB-plus," three steps above junk. Standard & Poor's cut Ford and Ford Credit to "BB-plus," its highest junk rating, on May 5.

Ford was the second-biggest issuer ever to be cut to junk, behind General Motors Corp. (GM), which was downgraded by S&P the same day. GM (search) and its finance arm have about $292 billion of debt.

The S&P downgrade will cause Ford's bonds to fall out of the Lehman Brothers credit index at the end of May, but the bonds will likely return to the index when new rules take effect in July.

The new rules allow bonds to stay in the index if two out of three agencies rate them investment-grade. Fitch is unlikely to cut Ford to junk status soon, strategists said.

Being in the index is important because it increases the number of investors who can buy Ford's bonds and keeps borrowing costs down.

But Ford is not out of the woods, because Moody's expects it to meet certain financial standards by 2007 to keep its ratings, said Mirko Mikelic, portfolio manager for Fifth Third Investment Advisors.

"Moody's has kind of put a soft line in the sand," Mikelic said.

Ford's shares fell 29 cents, or 3 percent, to $9.35 on the New York Stock Exchange. GM lost 38 cents, or 1.23 percent, to $30.62.