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Fitch Rates Ford's Proposed Notes 'BBB'

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned a rating of 'BBB' to Ford Motor Company's (Ford) proposed issuance of senior unsecured notes. The Issuer Default Rating (IDR) for Ford is 'BBB' with a Stable Outlook.

A full list of the ratings of Ford and its subsidiaries is included at the end of this release.

The proposed notes will be issued in two series, due 2026 and 2046. Proceeds will be used for general corporate purposes. Fitch expects the proposed notes will result in a slight increase in leverage, but leverage is expected to remain relatively low for Ford's rating category over the intermediate term.

KEY RATING DRIVERS

Ford's ratings are driven by the automaker's relatively low financial leverage, its improving global product portfolio and its commitment to maintaining strong liquidity. In addition, the company's ratings reflect Fitch's expectations for further long-term profitability improvement, particularly outside North America, as a result of the company's product initiatives and operational restructuring. Although the issuance of the new notes will drive Ford's leverage slightly higher than previous expectations, we expect leverage will remain in a range consistent with Ford's ratings. Proceeds from the new debt could also provide the company with an additional cash cushion as global auto market conditions become a little more uncertain and as the company increases investments in its mobility initiatives.

Following the proposed notes issuance, Fitch expects Ford will maintain its strong net cash position. Fitch expects that FCF will be pressured in the near term by costs related to the roll-out of the 2017 Super Duty pickup and higher fourth-quarter capital spending, but over the longer term, Fitch expects FCF to grow on improved product profitability and further operational efficiencies. Fitch expects Ford's automotive liquidity 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, augmented by about $10 billion in revolver capacity, which we believe is sufficient to allow the company to withstand a moderate to severe downturn without the need for significant additional borrowing.

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 mid-single-digit range. Margins are likely to be weighed down by continued weakness in the South American market and challenging conditions in Europe, despite the potential for modest near-term demand growth in both regions. Fitch expects North American (NA) margins to remain relatively strong over the longer term, in the high-single-digit range, as the company benefits from consumers' increasing preference for pickups and SUVs over compact and midsize passenger cars, although a combination of slightly weaker NA demand, increased mobility investments, and Super Duty launch costs will depress NA margins somewhat over the near term.

Fitch's calculated automotive EBITDA in the last 12 months (LTM) ended Sept. 30, 2016 was nearly $12 billion, leading to an automotive EBITDA margin of 8%. Ford's automotive debt was nearly $14 billion (excluding unamortized premiums, discounts and issuance costs), leading to automotive EBITDA leverage of 1.2x at Sept. 30, 2016. Fitch expects automotive leverage to remain in the low- to mid-1x range over the intermediate term, including the proposed issuance, and to slowly decline over the longer term on increased EBITDA and modest automotive debt reduction, primarily related to amortization of the company's U.S. Department of Energy loans.

Ford had over $24 billion in automotive cash, cash equivalents and marketable securities at Sept. 30, 2016, leading to a net cash position of nearly $11 billion. In addition to its cash and cash equivalents, Ford had about $10 billion available on its primary revolver (excluding $3 billion allocated to Ford Credit) at Sept. 30, 2016. Ford produced $2.7 billion automotive FCF (after regular dividends, but excluding supplemental dividends) in the LTM ended Sept. 30, 2016, but Fitch expects the company to produce full-year 2016 automotive FCF in the $500 million to $1 billion range on higher capital spending and lower operating cash flow in the fourth quarter of 2016.

Over the next decade, the global auto industry is likely to experience significant change from emerging vehicle technologies and new transportation business models. Among the traditional auto manufacturers, Ford has been one of the more active companies working on ways to remain relevant in this changing transportation context. It has been among the first mass-market auto manufacturers to strategically position itself to take advantage of changes in future transportation with various initiatives at its Ford Smart Mobility LLC subsidiary, which cover a range of technologies and businesses, from automated driving to car sharing. Although the company appears well positioned to compete as new technologies alter transportation over the next decade, uncertainty over the future competitive and technological landscape introduces significant risks as well.

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 at 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 returns excess cash to shareholders through supplemental dividends.

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

RATING SENSITIVITIES

--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.

Fitch maintains the following ratings on Ford and its subsidiaries with a Stable Outlook:

Ford Motor Company

--Long-Term IDR at 'BBB';

--Unsecured revolving credit facility rating at 'BBB';

--Senior unsecured notes rating at 'BBB'.

Ford Motor Co. of Australia Limited

--Long-term IDR at 'BBB'.

Ford Motor Credit Company LLC

--Long-Term IDR at 'BBB';

--Short-Term IDR at 'F2';

--Long-term senior shelf at 'BBB';

--Senior unsecured at 'BBB';

--Commercial paper (CP) at 'F2'.

FCE Bank Plc

--Long-Term IDR at 'BBB';

--Short-Term IDR at 'F2';

--Senior unsecured at 'BBB';

--CP at 'F2';

--Short-term deposits at 'F2'.

Ford Capital B.V.

--Long-Term IDR at 'BBB';

--Senior unsecured at 'BBB'.

Ford Credit Canada Limited

--Long-Term IDR at 'BBB';

--Short-Term IDR at 'F2';

--Senior unsecured at 'BBB';

--CP at 'F2'.

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

--Long-Term IDR at 'BBB'.

Ford Motor Credit Co. of Puerto Rico, Inc.

--Short-Term IDR at 'F2'.

Ford Holdings LLC

--Long-Term IDR at 'BBB';

--Senior unsecured at 'BBB'.

Date of relevant rating committee: May 26, 2016

Additional information is available at www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015919

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https://www.fitchratings.com/regulatory

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Fitch Ratings
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Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
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