Ford Might Be Headed for Junk Status

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Photo: Ford

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Ford is still struggling, California will meet with the Trump administration, a and a former UAW official gets prison. All of that and more in The Morning Shift for Friday, Nov. 8, 2018.

1st Gear: Ford Might Be Junk Again

Ford is still a hugely profitable company, despite Trump’s metals tariffs (which cost them $1 billion) and an $11 billion investment into its future. That future features no sedans except for the Mustang, and isn’t bleak for the company so much as highly uncertain.

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Which partially explains why Ford’s debt is now rated just above junk status, though, according to Bloomberg, it might be getting worse. Junk debt is the kind of debt that investors buy fully knowing it might never be fully paid back. The ratings also affect how much interest the company pays on its debt, which totals $150 billion.

From Bloomberg:

Bob Shanks, Ford’s chief financial officer, said on an earnings call last month that the company is committed to maintaining its investment-grade ratings, and doesn’t intend to lose that status again. The company is “moving with a sense of urgency and taking proactive steps to redesign and restructure the business,” and over time “the market will recognize our progress,” spokesman Brad Carroll said.

But debt investors are skeptical. The extra yield that money managers get for holding Ford’s 4.346 percent bonds due 2026 rather than similar Treasuries jumped to levels typical of high-yield companies. The cost of protecting Ford’s debt against default using credit derivatives rose in October to the highest levels since 2012 before settling down again. Moody’s downgraded the company in August to one level above junk, and said further cuts are possible in the medium term.

“There’s a better chance than not it ends up in high yield,” said Henry Peabody, a portfolio manager at Eaton Vance Corp. in Boston. “It’s a combination of a fairly weak strategic position, less than ideal strategic decisions over last handful of years, a smattering of overconfidence and where we’re at in the credit cycle.”

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The company remains in a precarious position.

Ford fared better during the financial crisis than GM and the automaker now known as Fiat Chrysler Automobiles NV, avoiding bankruptcy and the government-backed bailouts that its competitors received. But losing its investment-grade status forced Ford to finance itself on a secured basis, essentially putting everything from its inventory to the rights to its oval blue logo in hock.

2nd Gear: California’s Air Regulators to Meet Next Week With the Trump Administration

The state and 19 others have been at loggerheads with the Trump administration over emissions rules. Trump wants to roll back fuel efficiency standards imposed by the Obama administration starting in 2020, while also take away California’s long-held ability to make their own rules. Automakers, meanwhile, have been on the sidelines, quietly hoping their two parents stop fighting. That’s in part because no one really wants to deal with a split market.

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From Reuters:

The video conference meeting will be the first since Sept. 20 between the California Air Resources Board, the Environmental Protection Agency and the federal Transportation Department.

[…]

A senior administration official said the White House expected California to make a counterproposal at the meeting. A spokesman for the California board, Stanley Young, confirmed the meeting but declined further comment.

An EPA spokesman declined comment on the meeting.

The states, including California, New York, Illinois, Massachusetts and Pennsylvania, called the Trump administration proposal “unlawful” and “reckless.” They have vowed to sue if regulators move forward with the proposal.

A group representing major automakers including General Motors Co., Toyota Motor Corp. and Volkswagen AG last month urged Washington “to set achievable future standards that continue to advance environmental and energy goals while recognizing marketplace realities.”

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I don’t know where this one goes from here, since the automakers are at cross purposes with a presidential administration they should, on paper, support.

3rd Gear: A Fiat Chrysler Investor Wants the Company Out of Europe

The investor, ADW Capital Management, isn’t one of FCA’s top 100 shareholders, but its point is hard to ignore. FCA’s European divisions, including Maserati and Alfa Romeo, have been a drag, while Jeep and Ram continue to do well.

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From Bloomberg Law:

Fiat’s reliance on the U.S. market was stark during the third quarter, when hot-selling models like the Ram 1500 and Jeep Wrangler led to North American operations generating 97 percent of profits. While return on sales in the region overtook Ford Motor Co. and matched General Motors Co.’s margin, Fiat’s valuation continues to trail both its rivals.

“While Fiat has premium brands which are secularly growing, the strongest balance sheet and highest growth profile of all U.S. carmakers, the company trades at a significant discount to its closest peers, GM and Ford,” ADW Founder Adam Wyden, 34, wrote in the letter obtained by Bloomberg News.

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Ninety-seven percent of profits!

4th Gear: Former UAW, FCA Officials Get Prison for Collective Bargaining Scheme

Unions! We love them. And not only because Jalopnik is a union shop (Hello, WGA-E). But the UAW might be the worst of them, a (too?) mature organization that found itself engulfed in scandal earlier this year after a Fiat Chrysler executive admitted to $1.5 million in payments to union officials to influence collective bargaining negotiations. The investigation eventually ensnared a variety of other officials, two of whom were sentenced to prison on Wednesday after they were found guilty of federal charges.

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From the Detroit Free Press:

U.S. District Court Judge Paul Borman sentenced Michael Brown, formerly of FCA, and ex-union official Keith Mickens each to one year and one day in prison, ordered $10,000 fines and a year of supervised release after their prison time.

A key former FCA official, controller Jerome Durden, was sentenced later Wednesday morning to 15 months. He will have three years of supervised release and must pay restitution of more than $8,800 to the Internal Revenue Service.

All three will delay reporting to prison for six months so they can continue cooperating with prosecutors.

Mickens was the first former UAW leader sentenced in the case.

The illegal payments stemmed from what Mickens said was a “culture of corruption.”

Mickens, a 65-year-old Cass Tech High School graduate, admitted in court filings to “making over” invoices and using a training center credit card to buy $7,200 in personal items. Prosecutors have called Mickens Holiefield’s “right-hand man.” They say he “personally approved more than $700,000 in illegal payments from FCA to [former UAW Vice President General Holiefield] and Holiefield’s wife, codefendant Monica Morgan.”

Borman said in court that Mickens “was a guardian of the UAW’s position. … He violated his obligations to the UAW and FCA.”

Said Mickens, “I done wrong and broke the law, and I’m deeply ashamed of my actions.” He said he had no one to blame but himself.

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The UAW might be too big and too old to save itself, and the organization so far has whiffed on unionizing any autoworkers outside of the Big Three. What is the UAW for? And who?

5th Gear: Hyundai and Kia Won’t Have to Testify About Engine Fires in the Senate—Yet

They were supposed to next week, but Reuters reported yesterday that that’s now on hold. Nearly 1.7 million Hyundai and Kia cars have been recalled over defects in the cars’ Theta II engines. But some say that hasn’t been enough, and NHTSA, meanwhile, is also investigating.

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The reason the Senate hearing has been delayed is mysterious.

From Reuters:

The non-profit consumer advocacy group Center for Auto Safety said last month 103 fire complaints had been filed with U.S. safety regulators since June 12 and urged an immediate recall of nearly 3 million vehicles.

“While the committee does not anticipate convening a hearing on vehicle fire safety next week as previously contemplated, discussions among the committee and two auto manufacturers about participation at a future date remain ongoing,” Frederick Hill, a spokesman for Senator John Thune who chairs the Commerce Committee, said on Thursday.

Hyundai and its affiliate Kia — together the world’s No. 5 auto group — both said they had cooperated with Senate Committee staff on the issue and the National Highway Traffic Safety Administration (NHTSA) in its ongoing investigation.

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Reverse: The Fog of Ford

Neutral: Ford’s Going to Build Sedans Again Eventually Right?

Right?

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