Ford becomes largest fallen angel after S&P’s cut to junk

Ford Motor Co. was cut to junk by S&P Global Ratings as the coronavirus pandemic delivers a shock to the global auto industry and renders the carmaker the largest fallen angel to date.

S&P downgraded Ford’s credit rating one notch to BB+ and may cut it further, according to a statement. The move follows Moody’s Investors Service, which dropped its rating for the second time in six months earlier Wednesday. The automaker’s two high-yield ratings will remove its $35.8 billion of debt from the Bloomberg Barclays investment-grade index at the end of the month.

Ford is one of many auto companies facing what Moody’s calls an unprecedented “credit shock,” with the coronavirus outbreak also posing a major threat to peers including General Motors Co. and Volkswagen AG. But Ford is particularly at risk because of the problems it’s had executing an $11 billion restructuring that’s yet to improve performance.

What Bloomberg Intelligence Says

S&P’s downgrade of Ford to high yield will make the automaker the largest issuer in the Bloomberg Barclays index, ahead of current biggest Charter and Kraft Heinz combined. With about $27 billion of debt maturities by the end of 2021 and little access to the unsecured markets at this time, bondholders may need to consider structural subordination.

— Joel Levington, BI credit analyst

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With Ford’s factories shut around the globe — including all its North American plants — and no decision as to when they’ll resume production, the company is under immense financial pressure, according to S&P.

“The stress of having all of a company’s plants shut down differs from that of a conventional recessionary downturn,” the credit rater said, noting that the shutdowns mean Ford isn’t generating the revenue it needs to cover its costs. “The rate of cash burn, even for a few months, could be faster than that which transpires during a typical recession.”

Moody’s estimated in its downgrade of Ford that the company could burn through $8 billion in the coming 12 months due to the coronavirus-related downturn in demand, putting a significant dent in the $37.7 billion the company compiled by drawing down its credit lines last week. Moody’s praised Ford for taking the “constructive” step of also suspending its dividend.

The cost to protect Ford’s debt against default for five years has soared this month more than fourfold, though it’s come down this week. Its bonds due 2025 trade around 78 cents on the dollar.

“Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers,” the company said in an emailed statement. “We plan to emerge from this crisis as a stronger company.”

Ford shares fell as much as 7.1% after the close of regular trading and were down 0.9% as of 6:15 p.m. in New York. The stock has dropped 42% this year.

— By Olivia Raimonde and Keith Naughton (Bloomberg)