Fitch's Ford Rating: Dumb And Late
Richard Lehmann, Forbes/Lehmann Income Securities Investor 03.15.06, 1:00 PM ET
MIAMI, Fla. -
Fitch Ratings cut the credit rating of Ford Motor further, from BB+ to BB, citing as rationale statements such as: "The potential for labor actions, potential financial support and costs related to re-sourcing and double-sourcing all point toward potentially higher direct costs from Ford's supplier base." Also cited: "Clearly the deep stresses" among auto-parts suppliers "will make the cost-cutting more difficult." The luminary at Fitch responsible for these nuggets of wisdom goes on to opine that Ford's cash reserves would be depleted quickly should suppliers begin requiring Ford to pay cash for parts and services, since suppliers could soon grow wary about Ford's ability to stay current on payments. And not to leave anyone out, General Motors was thrown in the mix as having the same problems.
What is wrong with this picture? Why do my 23 years of tracking and reporting on corporate bankruptcies make me skeptical of these broad indictments by a credit rating agency, an agency that is supposed to give objective opinions based on known or at least knowable facts? Here are some of those knowable facts:
--Ford (nyse: F - news - people )has $25 billion dollars in the bank versus debts of only $18 billion;
--It earned $2 billion worldwide last year despite huge losses in the U.S. market;
--Ford's balance sheet still sports $13.9 billion of shareholder equity;
--It owns one of the largest, most profitable finance companies in the world.
At this rate, Ford could continue losing money for a decade and survive, although long before then the credit rating agencies will have run out of rating letters and symbols.
It's not like Ford and General Motors (nyse: GM - news - people ) aren't aware of their problems and aren't busy trying to fix them. It's just that what the companies are doing doesn't seem to matter to the credit police. Ever since the Enron debacle, credit agencies have been on a campaign to restore their credibility. They have an agenda of their own and it's all about ratings competition. They are now in a race to outshine their competitors, even though there are only three players in this race.
A closer reading of the above cited statements by Fitch allows for some entirely different interpretations. What Fitch is saying is that because of its perceptions of Ford's outlook, parts suppliers will be more demanding on the company, thereby weakening Ford's financial position. Hence, they feel they need to anticipate the fallout from their dismal forecast by downgrading the company now and projecting more bad news for the future. This is the classic example of a self-fulfilling prophecy. They might as well say that they are cutting their ratings because of possible future rating declines. Similar rating actions such as these lead to weaker players such as Calpine (nyse: CPN - news - people ) and Mirant (nyse: MIR - news - people ) having their credit cut off, precipitating an eventual bankruptcy.
What is missing from the Fitch interpretation of events is recognition of business realities. A parts supplier to Ford or GM is a weak-to-strong relationship that does not change just because the weak go into bankruptcy. The strong still determine how much they will buy, only now that the weak are in bankruptcy and in a position to dramatically lower their costs, the strong can look to lower component costs in the future. Yes, the weak can terminate the supply contracts and ask for higher prices, but the strong can feel free to multi-source in the future and use supplier competition to their advantage. It's like airline bankruptcies: They drove down fares; they didn't increase them.
As for that nugget about how suppliers are going to demand cash payments and stricter terms in the future, this is sheer nonsense. It's a well-known truism that he who has the gold makes the rules.
If credit agencies were of a mind to weigh fairly all of the factors currently at play in the auto industry, the bankruptcy of the suppliers could just as easily be interpreted as a fortuitous event. In effect, the quote from Fitch could read, "Bankruptcy of parts suppliers will speed up Ford's plans to downsize and to reduce component costs and will serve as the model for their own labor concession negotiations. Once the United Auto Workers sees how costly contract concessions in bankruptcy are, they will be reluctant to push GM or Ford into a similar negotiating position." In effect, the ratings outlook for Ford could just as easily have changed from negative to positive or no rating change needed to occur. But then, such a scenario does not fit into the strategic plans of the credit agencies that have Fitch lagging Moody's and S&P in their downgrade derby to the bottom for Ford and GM.
Ford and GM can do no right by these agencies, just as you won't ever see a front-page headline on The New York Times that reads "Iraq's Missing WMD Mystery Solved." The only mystery here is how these credit rating agencies will dig out of this new credibility hole they are digging for themselves.
******
Ding ding ding. I've been saying this to whoever will listen for quite awhile. The agencies are acting with an agenda they have no business burdening already struggling companies with. Disappointing to say the least.
Richard Lehmann, Forbes/Lehmann Income Securities Investor 03.15.06, 1:00 PM ET
MIAMI, Fla. -
Fitch Ratings cut the credit rating of Ford Motor further, from BB+ to BB, citing as rationale statements such as: "The potential for labor actions, potential financial support and costs related to re-sourcing and double-sourcing all point toward potentially higher direct costs from Ford's supplier base." Also cited: "Clearly the deep stresses" among auto-parts suppliers "will make the cost-cutting more difficult." The luminary at Fitch responsible for these nuggets of wisdom goes on to opine that Ford's cash reserves would be depleted quickly should suppliers begin requiring Ford to pay cash for parts and services, since suppliers could soon grow wary about Ford's ability to stay current on payments. And not to leave anyone out, General Motors was thrown in the mix as having the same problems.
What is wrong with this picture? Why do my 23 years of tracking and reporting on corporate bankruptcies make me skeptical of these broad indictments by a credit rating agency, an agency that is supposed to give objective opinions based on known or at least knowable facts? Here are some of those knowable facts:
--Ford (nyse: F - news - people )has $25 billion dollars in the bank versus debts of only $18 billion;
--It earned $2 billion worldwide last year despite huge losses in the U.S. market;
--Ford's balance sheet still sports $13.9 billion of shareholder equity;
--It owns one of the largest, most profitable finance companies in the world.
At this rate, Ford could continue losing money for a decade and survive, although long before then the credit rating agencies will have run out of rating letters and symbols.
It's not like Ford and General Motors (nyse: GM - news - people ) aren't aware of their problems and aren't busy trying to fix them. It's just that what the companies are doing doesn't seem to matter to the credit police. Ever since the Enron debacle, credit agencies have been on a campaign to restore their credibility. They have an agenda of their own and it's all about ratings competition. They are now in a race to outshine their competitors, even though there are only three players in this race.
A closer reading of the above cited statements by Fitch allows for some entirely different interpretations. What Fitch is saying is that because of its perceptions of Ford's outlook, parts suppliers will be more demanding on the company, thereby weakening Ford's financial position. Hence, they feel they need to anticipate the fallout from their dismal forecast by downgrading the company now and projecting more bad news for the future. This is the classic example of a self-fulfilling prophecy. They might as well say that they are cutting their ratings because of possible future rating declines. Similar rating actions such as these lead to weaker players such as Calpine (nyse: CPN - news - people ) and Mirant (nyse: MIR - news - people ) having their credit cut off, precipitating an eventual bankruptcy.
What is missing from the Fitch interpretation of events is recognition of business realities. A parts supplier to Ford or GM is a weak-to-strong relationship that does not change just because the weak go into bankruptcy. The strong still determine how much they will buy, only now that the weak are in bankruptcy and in a position to dramatically lower their costs, the strong can look to lower component costs in the future. Yes, the weak can terminate the supply contracts and ask for higher prices, but the strong can feel free to multi-source in the future and use supplier competition to their advantage. It's like airline bankruptcies: They drove down fares; they didn't increase them.
As for that nugget about how suppliers are going to demand cash payments and stricter terms in the future, this is sheer nonsense. It's a well-known truism that he who has the gold makes the rules.
If credit agencies were of a mind to weigh fairly all of the factors currently at play in the auto industry, the bankruptcy of the suppliers could just as easily be interpreted as a fortuitous event. In effect, the quote from Fitch could read, "Bankruptcy of parts suppliers will speed up Ford's plans to downsize and to reduce component costs and will serve as the model for their own labor concession negotiations. Once the United Auto Workers sees how costly contract concessions in bankruptcy are, they will be reluctant to push GM or Ford into a similar negotiating position." In effect, the ratings outlook for Ford could just as easily have changed from negative to positive or no rating change needed to occur. But then, such a scenario does not fit into the strategic plans of the credit agencies that have Fitch lagging Moody's and S&P in their downgrade derby to the bottom for Ford and GM.
Ford and GM can do no right by these agencies, just as you won't ever see a front-page headline on The New York Times that reads "Iraq's Missing WMD Mystery Solved." The only mystery here is how these credit rating agencies will dig out of this new credibility hole they are digging for themselves.
******
Ding ding ding. I've been saying this to whoever will listen for quite awhile. The agencies are acting with an agenda they have no business burdening already struggling companies with. Disappointing to say the least.
