A shift in the underlying financials at Ford Motor Credit Co. is resulting in a suspension of the captive’s usual distribution to its parent, Ford Motor Co.
The issue is managed leverage. Managed leverage — which is adjusted debt over adjusted equity — is expected to close the year at the upper end of a range of an 8x to 9x target at Ford Credit, down from 9.4x at quarter end, according to a research report from JP Morgan Chase & Co.
As a result, the captive does not expect to pay distributions in 2016, “to support returning managed leverage to the upper end of our targeted range” the captive wrote in its first quarter earnings presentation. Ford Credit paid $250 million to Ford Motor last year.
Lease residual prices under-performed expectations last quarter at Ford Credit, down about $700 per unit year over year. The drop reflects an industry-wide oversupply issue, and the company continues to expect elevated lease return volume in 2016 and 2017, according to JPM.
“We have, across the industry, more units coming back from the increasing rates of lease over the last number of years,” Ford Motor Co.’s Chief Robert Shanks said during the parent’s 1Q earnings call last week. “We’ll have about 200,000 units coming back this year.”
