Fitch Cuts Ford to Junk, Outlook Negative

Fitch Ratings Monday cut its ratings on Ford Motor Co. (F) to junk status, the third of the three major rating agencies to strip the second-largest U.S. automaker of its investment-grade ratings.

The downgrade reflects ongoing market share losses, slumping sales of sport utility vehicles and competition at Ford's core North American auto operations, Fitch said.

Ford's profit margins have been squeezed by fierce competition from foreign rivals and a slowdown in sales of large SUVs due to high gasoline prices. Pension and health care costs also remain a concern, Fitch said.

Fitch also cut to junk the ratings on Ford's Ford Motor Credit finance arm, where most of Ford's $142 billion of consolidated debt is issued. The downgrade will eject Ford Credit from the widely followed Lehman Brothers credit index, limiting the investors who can buy its bonds and raising borrowing costs.

"It was already assumed that it would be knocked out of the indices," as both Moody's Investors Service and Fitch had Ford on review for downgrade, said Brad Rubin, senior credit analyst at BNP Paribas in New York.

Companies are ejected from the Lehman index if their debt is rated junk by two of the three major agencies. Ford and Ford Credit were both downgraded to junk status by Standard & Poor's in May.

"We remain committed to accelerating our business plans," said Ford spokeswoman Marcey Evans. "As we've said, further details of those plans will be announced in January and we really cannot comment further at this time."

Ford has said it will unveil a major restructuring plan next month to restore North American operations to profitability. Those operations lost $1.2 billion during the third quarter.

Ford's situation could start looking up if it gets cost concessions from its union and launches a successful new line of products before any recession hits, said Jeff Hines, president of Sovereign Advisers, which has $2 billion of fixed-income assets under management. A weaker dollar would also help by reducing the cost advantage Japanese automakers have because of a weak yen, he said.

"There's still some time and there's financial flexibility," Hines said.

Fitch cut Ford's senior unsecured rating to "BB-plus," the highest junk rating, from "BBB-minus." The rating outlook is negative, meaning another downgrade is likely over the next one to two years.

In the credit derivatives market, the cost of protecting Ford's debt against default rose about 10 basis points to 895 basis points, or $895,000 for every $10 million protected, while Ford Motor Credit's protection costs rose about 10 basis points to about 535 basis points.

Prices of Ford's 7.45 percent bonds due in 2031 fell to 71 cents on the dollar, down from 71.25 cents on Friday, according to MarketAxess.

Ford's shares fell 6 cents, or 0.72 percent, to $8.24 on the New York Stock Exchange.