Moody's Gives Ford and GM Six Months to Prove Their Worth

Strategic Insights -

Moody's Investors Service has warned Ford Motor Co. and General Motors Corp. that they have six months to prove themselves worthy of their current ratings, with a focus on maintaining market share and managing costs. Analysts noted that market share is a key concern for both companies, with GM struggling to maintain its 26% market share after seeing a 6.7% drop in sales in 2005. Meanwhile, Ford has a 19% market share, but its sales have not suffered as much as GM's. Another area of concern is the impact of benefits costs on the companies' balance sheets, with GM facing OPEB and VEBA obligations of $61 billion and $20 billion, respectively.

Key Takeaways:

  • Moody's has given Ford and GM six months to prove themselves worthy of their current ratings.
  • Market share is a key concern for both companies, with GM struggling to maintain its 26% market share.
  • Ford has a 19% market share, but its sales have not suffered as much as GM's.
  • Both companies have significant benefits costs, with GM facing OPEB and VEBA obligations of $61 billion and $20 billion, respectively.
  • Although both companies have huge cash reserves, Moody's analysts noted that liquidity is a concern and does not guarantee better fundamental credit.
  • Ford has a stronger liquidity position than GM, with $22 billion compared to GM's $18 billion.
  • Both companies can be aided by their relationships with their financing arms, but Moody's analysts are skeptical of this factor.

Statistics:

  • GM's market share has dropped 6.7% in 2005 compared to last year.
  • Ford's sales have not suffered as much as GM's, but market share is still a concern.
  • GM faces OPEB and VEBA obligations of $61 billion and $20 billion, respectively, which cost the company around $5 billion per year.
  • Ford has OPEB obligations of $32 billion and VEBA of $9 billion for an annual cost of $4 billion.
  • Both companies have huge cash reserves, with Ford having $22 billion and GM having $18 billion in liquidity.
  • Moody's analysts expect both companies to have EBITA margins of 4% in 2007.
  • Moody's analysts expect both companies to have fixed-charge coverage of 3.5 to 4 times and free cashflow to adjusted debt ratio of 15% in 2007.

Sources:

  • Moody's Investors Service
  • Bruce Clark, senior vice president in the financial institutions group
  • Asset Securitization Report
  • SourceMedia, Inc.