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Fitch Upgrades Ford & Ford Credit IDRs to 'BBB'; Outlook Stable

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) for Ford Motor Company (Ford) and its Ford Motor Credit Company LLC (Ford Credit) finance subsidiary to 'BBB' from 'BBB-'. The Rating Outlook for both is Stable. A full list of the rating actions taken on Ford and each of its subsidiaries follows at the end of this release.

KEY RATING DRIVERS: FORD

The upgrade of Ford's ratings is driven by the automaker's declining financial leverage, its improving global product portfolio and its commitment to maintaining strong liquidity. In addition, the upgrade reflects Fitch's expectations for further profitability improvement, particularly outside North America, as a result of the company's product initiatives and operational restructuring. Fitch expects leverage to decline over the intermediate term as the company repays maturing debt obligations with cash and as earnings and free cash flow rise.

Ford's pension plans are well funded, and de-risking actions over the past several years have largely insulated them from future changes in interest rates. In addition, the company has grown its share in key emerging markets, most notably China, which has reduced its reliance on the mature NA and Western European markets. Overall, Fitch believes Ford's increasingly competitive product portfolio and its lower and more flexible cost structure have strengthened its ability to withstand the inherent cyclical and secular pressures faced by all global auto manufacturers, while maintaining a solid investment-grade credit profile.

In a moderate to severe downturn, Fitch expects that Ford would likely experience a significant cash outflow due to its inherent operating leverage, working capital profile, and capital expenditure needs. However, Fitch expects that the company's automotive net cash position of about $11 billion as of Mar. 31, 2016, along with about $10 billion of automotive revolver availability, would provide it with sufficient financial flexibility to withstand a severe decline in demand. Ford also has discretion over a portion its planned capital deployment which could further relieve liquidity pressures in a downturn. This could include delaying certain capital expenditures, limiting pension contributions to only those that are mandatory, forgoing supplemental dividends and holding regular dividends flat. In addition, various post-recession changes in Ford's business profile have also positioned it to better withstand a downturn. The company's break-even sales level is much lower as a result of restructuring actions and an increased use of global platforms, its lower-priced passenger cars are more competitive, and its sales are more globally diversified.

MOBILITY INITIATIVES

Ford was one of the first mass-market auto manufacturers to strategically position itself to take advantage of potential changes in future personal transportation with its Smart Mobility initiatives. The initiatives cover a wide range of mobility issues, from automated driving to car sharing, and the company recently set up a separate subsidiary, Ford Smart Mobility LLC, to manage these disparate projects. Although a number of the initiatives are unlikely to have a material impact on the company's financial performance for at least several years, Fitch views Ford's investments in these areas positively. Thus far, Ford has largely drawn upon its in-house engineering resources to develop a number of these initiatives, but has also invested in some relatively small acquisitions and partnerships to move these initiatives forward.

Although Fitch believes Ford will be relatively well positioned to compete as new technologies alter personal transportation over the next decade, uncertainty over the future competitive and technological landscape introduces significant risks as well. In particular, a number of potential competitors, including startups and technology companies from outside the traditional auto sector, are actively working to disrupt the existing automotive business model, and Ford, along with other mass-market auto manufacturers, could face significant challenges in the face of a rapidly changing business environment.

CREDIT METRICS STRENGTHENING

Fitch expects Ford's profitability to remain relatively solid for a global mass-market auto manufacturer over the intermediate term, with automotive EBIT margins in the 4% to 5% range. Margins are likely to be weighed upon by continued weakness in the South American market and challenging conditions in Europe, where industry overcapacity will continue to depress profitability. However, Fitch expects NA margins to remain relatively strong, in the high-single-digit range, as the company benefits from consumers' increasing preference for SUVs over sedans and as the company continues to lower its cost structure in the region. Fitch notes, however, that slowing demand growth in the NA market increases the risk of intermediate-term margin pressure.

Ford's automotive credit profile has strengthened over the past two years, and Fitch expects the improvement to be sustainable over the intermediate term. Fitch expects EBITDA leverage (debt/Fitch-calculated EBITDA) to remain in the low-1x range over the next couple of years and potentially decline below 1x even in a moderating demand environment as the company continues to use FCF to pay down maturing debt obligations. Actual EBITDA leverage was 1.1x at March 31, 2016. FFO adjusted leverage, which was 1.3x at March 31, 2016, is likely to remain low as well, although variability in FFO could cause more volatility in this leverage metric.

Fitch expects Ford's automotive liquidity, both cash and revolver capacity, to remain strong over the long term, which will provide the company with a substantial cushion in the event of an unexpected downturn. The company continues to target a cash balance of about $20 billion, which Fitch believes would be sufficient to help the company weather a moderate to severe downturn without the need for significant additional borrowing. As of March 31, 2016, Ford had over $24 billion in automotive cash, cash equivalents and marketable securities, augmented by over $10 billion in available revolver capacity (excluding $3 billion revolver capacity that was allocated to Ford Credit). In April 2016, Ford amended and extended the revolver, maintaining its overall capacity, but shifting its maturities out by one year.

FCF INCREASING

Fitch expects Ford's FCF in 2016 to be substantially lower than the $2.8 billion recorded in 2015, due largely to a combination of higher capital spending to support future product and growth initiatives, as well as higher discretionary pension contributions as the company continues to de-risk its funded plans. As a result, Fitch expects Ford to produce FCF below $500 million in 2016, excluding the impact of the $1 billion supplemental dividend paid in the first quarter of 2016 (1Q16). Beyond 2016, Fitch expects FCF to grow substantially, despite capital spending that will likely remain elevated by historical standards, driven largely by increased profitability and lower pension contributions. Fitch expects FCF margins to run in the low-single-digit range over the intermediate term, excluding any supplemental dividends.

In January 2016, Ford announced that going forward, it would return excess cash to shareholders via supplemental dividends and subsequently paid a $1 billion supplemental dividend later in the quarter. The company noted at the time of the announcement that the supplemental dividend would be paid in lieu of a broader share repurchase program, due to the particular nature of Ford's shareholder base. Fitch has excluded supplemental dividends from its FCF calculation, as it views the dividends as discretionary in nature, and the company has communicated to its shareholders that the amount of any supplemental dividends could vary over time, depending on the company's capital deployment needs.

In addition to its FCF, Ford at times also receives cash from Ford Credit in the form of distributions. In 2015, Ford received $293 million in distributions from Ford Credit. Going forward, Fitch expects distributions from Ford Credit will vary from year-to-year depending on Ford Credit's capital requirements. In some years, Ford Credit may not make any distributions to Ford.

STRONG AUTOMOTIVE LIQUIDITY

Fitch expects Ford to maintain a strong liquidity position going forward, as the company targets an automotive cash balance of about $20 billion, augmented by substantial revolver capacity. At March 31, 2016, the company's automotive cash balance exceeded its target level, with over $24 billion in automotive cash, cash equivalents and marketable securities. As such, Ford's automotive cash exceeded its automotive debt by about $11 billion.

Ford amended and extended its revolver in April 2016, maintaining a total commitment of $13.4 billion, of which $3 billion is exclusively available to Ford Credit. With the amendment and extension, 25% of the revolver commitment matures in 2019 and 75% matures in 2021. At March 31, 2016, of the $10.4 billion in commitments allocated to Ford's automotive operations, nearly the full amount was available, as there were no borrowings outstanding, and only $45 million was utilized to back letters of credit. Including available revolver capacity, Ford's total liquidity position was about $35 billion or roughly $21 billion net of automotive debt.

WELL-FUNDED PENSIONS PLANS

Ford's pension plans are generally well funded, and Fitch does not view them as posing a significant risk to the company's credit profile. At year-end 2015, the company's global pension plans were underfunded by $8.2 billion on a GAAP projected benefit obligation (PBO) basis, leading to a funded status of 89%. The company's U.S. plans were 92% funded, with an underfunded position of $3.7 billion. Ford contributed $1.1 billion to its global funded pension plans in 2015 and made $400 million in payments to its unfunded plans. In 2016, the company plans to increase its contributions to its funded plans to $1.5 billion, while contributing another $300 million to its unfunded plans. About $400 million of the contributions to the funded plans will be discretionary as part of Ford's pension de-risking strategy, with the rest of the contributions required to legal funding requirements.

KEY ASSUMPTIONS

--U.S. industry light vehicle sales total about 17.5 million units in 2016 and global sales rise in the low-single-digit range.

--Beyond 2016, U.S. industry sales growth plateaus around 17 million per year, the Chinese market grows at a low- to mid-single-digit rate, Western Europe continues to improve and South America slowly improves, but other developing markets are uneven.

--Over the intermediate term, Ford's revenue growth is tied primarily to global volume growth and modest price increases, while global market share is held about constant.

--Automotive EBITDA margins rise over the next several years as global production volumes grow, the company makes continued progress on cost efficiencies, and profitability rises on new model introductions, while spending on mobility initiatives, as well as increased vehicle technology investments put some downward pressure on margins.

--Capital spending runs at about 5% to 6% of automotive revenue over the intermediate term.

--The company uses supplemental dividends to return excess cash to shareholders.

--The company maintains a target automotive cash balance of about $20 billion, augmented by about $10 billion of automotive revolver capacity.

KEY RATING DRIVERS: FORD CREDIT

The IDRs and senior unsecured debt ratings of Ford Credit have been upgraded as a result of the direct linkage to Ford's ratings. Fitch considers Ford Credit to be a 'core' subsidiary of Ford due to its importance to Ford, as demonstrated by the high percentage of Ford vehicles sales financed by Ford Credit, and the strong operational and financial linkages between the two companies. Ford Credit further has a support agreement with Ford, which requires Ford to make capital contributions to Ford Credit, if Ford Credit's leverage ratio (defined as net debt-to-equity) were to be higher than 11.5x. The ratings also reflect Ford Credit's strong credit profile, consistent operating performance, peer superior asset quality, and good liquidity and risk-adjusted capitalization.

STRONG GROWTH IN LEASING

Ford Credit's managed portfolio increased 17% to $132 billion at quarter-end 1Q16 from $113 billion at 1Q15 primarily driven by an increase in net operating leases, which grew 18% year over year. The lease portfolio reached $25.9 billion at 1Q16, but is still below the pre-crisis peak of $29.7 billion in 2007. Fitch notes that leasing can be a riskier strategy than lending as it exposes the company to residual value risk outside of the recovery values on defaulted loans, particularly when used car values have remained elevated in recent years and are expected to weaken as the number of vehicles coming off lease increases over the next few years. However, Fitch believes that Ford Credit has a solid track record of managing its residual value exposure and expects the company to be prudent in setting residual values on new lease originations.

PROFITABILITY STABLE

Operating performance improved 1Q16 versus 1Q15 as loan/lease growth and a higher net interest margin more than offset a near doubling of the loan loss provision and downward pressure on residual values of leases stemming from lower auction prices. Fitch expects Ford Credit will generate solid profitability in 2016 but does not expect a significant improvement over 2015, as record SAAR volume posted in 2015 stabilizes, resulting in more moderate loan/lease growth and credit performance begins to normalize toward historical levels which should result in higher loan loss provisions.

SOLID ASSET QUALITY

Asset quality continues to perform favorably compared to peers with Ford Credit reporting a global loss-to-receivables ratio of 0.29% in 1Q16 versus 0.22% in 1Q15. Fitch expects asset quality will continue to normalize given portfolio seasoning and softening in used car prices. The average severity of loss in the U.S. market increased to $9,800 per vehicle in 1Q16, up 18% y/y. The higher severity of loss is the result of lower auction values on vehicles, higher balances at repossession (longer avg. loan terms), and higher amounts financed. Allowance for loan losses has been prudently managed and measured 0.35% globally at 1Q16, offering a reasonable coverage level over net losses.

ELEVATED LEVERAGE

Managed leverage, calculated by Ford Credit, measured 9.4x at 1Q16, down slightly from 9.5x at YE 2015, but up from 8.8x a year ago and is above the higher end of management's target range of 8x - 9x although the support agreement allows for up to 11.5x. In order to bring leverage back down to within the targeted range, the company plans to forgo dividends to the parent in 2016, which when coupled with more moderate asset growth in 2016, should result in lower leverage. Fitch believes Ford Credit's higher leverage relative to other captives is reflective of its higher quality loan/lease portfolio, which has shown superior credit performance relative to many of its captive peers. Nevertheless, leverage remains higher than standalone finance company peers. Funding and liquidity continue to improve as the company is continuing to reduce its reliance on secured funding sources, which should offer greater funding flexibility in times of stress and result in a larger pool of unencumbered assets benefiting unsecured creditors.

Short-term debt, both on an absolute basis and as a percentage of total debt, has been declining post-crisis. Fitch recognizes the motivation to fund short term, as short-term funding is generally less costly. However, overreliance on short-term funding adds to refinancing/liquidity risk during times of market stress, and so Fitch views the lower reliance on short-term funding by Ford Credit positively. Currently, short-term debt is at a reasonable level of Ford Credit's total debt (9.4% at 1Q16), especially considering the short duration assets such as the commercial floorplan receivables and auto leases. A material increase in short-term funding would be viewed negatively by Fitch.

The upgrade of Ford Credit's short-term IDR to 'F2' from 'F3' reflects potential liquidity support available from Ford as well as Ford Credit's good standalone liquidity profile, in terms of the short duration of its assets relative to its overall debt, a relatively low reliance on commercial paper issuance, high asset quality, and strong cash flow generation capacity.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Maintaining a North American automotive EBIT margin above 10% on a sustained basis;

--Maintaining a global automotive EBIT margin above 4% on a sustained basis;

--Maintaining a FCF margin of 2% or higher;

--Continued progress toward reducing automotive debt to $10 billion by 2018;

--Further sales growth in developing regions.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--A decision to reduce the company's automotive cash target to below $20 billion;

--A sustained period of negative FCF, excluding non-recurring items;

--A shift away from the company's debt-reduction activities, particularly to fund shareholder-friendly activities;

--An unexpected merger or acquisition that materially weakens the company's credit profile.

RATING SENSITIVITIES: FORD CREDIT

The LT IDRs, senior unsecured ratings and Rating Outlook for Ford Credit are linked to the ratings of Ford. As such, Ford Credit's ratings will move in tandem with any changes in the parent's ratings. Any change in Fitch's view on whether Ford Credit remains a core subsidiary could change this rating linkage and result in Ford Credit being rated lower than Ford. Finally, were Ford or Ford Credit's liquidity profile to materially deteriorate, this could result in Ford Credit's ST IDR being downgraded to 'F3' from 'F3' even if the LT IDR was unchanged.

A sustained, material increase in leverage, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio, could become constraining factors on the parent's ratings. Fitch cannot currently envision a scenario where Ford Credit would be rated higher than the parent.

Fitch is withdrawing the ratings of Ford Credit Australia Ltd., Ford Credit Co. S.A. de C.V., and Ford Motor Credit Co. of New Zealand Ltd. as these issuers no longer exist. Accordingly, Fitch will no longer provide ratings or analytical coverage for these issuers.

Fitch has upgraded the following ratings with a Stable Rating Outlook:

Ford Motor Company

--Long-term IDR to 'BBB' from 'BBB-';

--Unsecured revolving credit facility rating to 'BBB' from 'BBB-';

--Senior unsecured notes rating to 'BBB' from 'BBB-'.

Ford Motor Co. of Australia Limited

--Long-term IDR to 'BBB' from 'BBB-'.

Ford Motor Credit Company LLC

--Long-term IDR to 'BBB' from 'BBB-';

--Short-term IDR to 'F2' from 'F3';

--Long-term senior shelf to 'BBB' from 'BBB-';

--Senior unsecured to 'BBB' from 'BBB-';

--Commercial paper (CP) to 'F2' from 'F3'.

FCE Bank Plc

--Long-term IDR to 'BBB' from 'BBB-';

--Short-term IDR to 'F2' from 'F3';

--Senior unsecured to 'BBB' from 'BBB-';

--CP to 'F2' from 'F3';

--Short-term deposits to 'F2' from 'F3'.

Ford Capital B.V.

--Long-term IDR to 'BBB' from 'BBB-';

--Senior unsecured to 'BBB' from 'BBB-'.

Ford Credit Canada Limited

--Long-term IDR to 'BBB' from 'BBB-';

--Short-term IDR to 'F2' from 'F3';

--Senior unsecured to 'BBB' from 'BBB-';

--CP to 'F2' from 'F3'.

Ford Credit de Mexico S.A., de C.V. Sociedad Financiera de Objeto Multiple, E.R.

--Long-term IDR to 'BBB' from 'BBB-'.

Ford Motor Credit Co. of Puerto Rico, Inc.

--Short-term IDR to 'F2' from 'F3'.

Ford Holdings LLC

--Long-term IDR to 'BBB' from 'BBB-';

--Senior unsecured to 'BBB' from 'BBB-'.

The following ratings have been withdrawn:

Ford Credit Australia Limited

--Long-Term IDR (rated 'BBB-');

--Short-Term IDR (rated 'F3');

--CP (rated 'F3').

Ford Credit Co. S.A. de C.V.

--Long-Term IDR (rated 'BBB-');

--Senior unsecured (rated 'BBB-').

Ford Motor Credit Co. of New Zealand Limited

--Long-Term IDR (rated 'BBB-');

--Short-Term IDR (rated 'F3');

--Senior unsecured (rated 'BBB-');

--CP (rated 'F3').

Additional information is available at 'www.fitchratings.com'.

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005257

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005257

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst (Ford)
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst (Ford)
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Primary Analyst (Ford Credit)
Michael Taiano, CPA
Director
+1-646-582-4956
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Richard Wilusz (Ford Credit)
Associate Director
+1-312-368-5459
Secondary Analyst
or
Committee Chairperson (Ford)
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson (Ford Credit)
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

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