NEW YORK (Dow Jones)--There's a world of difference between where Moody's Investors Service rates Ford Motor Co.'s (F) finance unit and where the market fears Standard & Poor's will rate the company, Ford Motor Credit, in the next few days.
The difference between an A3 rating by Moody's, which is four notches above junk, and a possible triple-B-minus rating by S&P, which is one notch above junk, is the difference between restful and sleepless nights for bond investors.
On Oct. 21, S&P said it was reviewing Ford's rating for possible downgrade and would have a decision by Nov. 18. A downgrade would affect $180 billion in debt, including $150 billion in debt issued by Ford Motor Credit.
But how did the top two rating agencies get so far apart on the largest name in the corporate bond market?
Patience, pensions and persuasion, say analysts.
"I believe it comes down to Moody's trying to be more patient and rate through the cycle, not with the cycle," said Brian Jacobi, credit analyst at Morgan Stanley. "They're saying that companies in this industry will look really good at the peak of the cycle and really bad at the trough."
Ford has given itself until mid-decade to implement its restructuring plan and return to strong profitability.
Moody's appears more willing to ride it out, while S&P has been looking for milestones on the trip.
Earlier this year, S&P's lead auto analyst Scott Sprinzen said he was looking for Ford to break-even in its auto operations by the end of 2003.
And, despite progress toward that goal, Sprinzen told investors during a conference call after putting Ford on review that achieving break-even alone was not sufficient to maintain the rating.
"How could anyone have thought just breaking even in a core business in a fairly good year was really all it would take to solidify this rating?" Sprinzen asked irate investors.
Then there's the issue of pensions.
S&P has taken a hard line on underfunded pensions, and not just in the auto sector. It views unfunded pension liabilities, health care obligations and all other forms of deferred compensation as debt.
Moody's has been less inclined to see underfunded pensions as set in stone.
That's because of the potential for a rising stock market to increase the value of pension plan assets and decrease underfunding. Also, a rise in interest rates would reduce underfunding as pension plan managers could assume a higher discount rate on pension assets.
While pension obligations have drawn increasing concern from investors, some credit analysts prefer to look on the bright side.
"We believe that (S&P's) methodology makes it effectively impossible for S&P to rate Ford and GM through the cycle, and in our opinion - assuming a normal sustained macroeconomic expansion - will likely require upgrades some time down the road," Bear Stearns credit analysts wrote in research report this week.
Finally, there's the question of whether to tether the ratings of Ford Motor Credit to Ford Motor Co.
Two years ago, Ford and General Motors Corp. (GM) set out to convince the rating agencies that their finance units should be rated higher than the parents' ratings. |
