Cash Management

Ford Cuts Sink Suppliers’ Credit Ratings

The auto-parts companies' fourth-quarter cash flow and liquidity will likely be "perhaps significantly" reduced from previous expectations, accordi...
Stephen TaubAugust 21, 2006

Ford Motor’s sweeping plan to cut its North American production by 21 percent is already having widespread ramifications. Standard & Poor’s Ratings Services, in fact, placed the ratings of eight U.S. auto suppliers— including well-known Visteon Corp.—on CreditWatch with negative implications,

The other seven companies include Citation Corp., Cooper-Standard Automotive Inc., Hayes Lemmerz International Inc., Mark IV Industries Inc., Metaldyne Corp., Plastech Engineered Products Inc., and Yazaki International Corp.

S&P reported that most of the suppliers had negative outlooks before the Ford announcement. The auto company’s production cuts, however, “will adversely affect on several fronts those suppliers with substantial Ford exposure,” S&P said in a press release.

The suppliers’ fourth-quarter cash flow and liquidity will likely be “perhaps significantly” reduced from previous expectations, according to the rating agency. “The magnitude of the reduction in liquidity will depend on other calls on cash in the quarter, availability under existing bank facilities, and any mitigating actions, although such offsets within the quarter may be limited,” it added.

The long-term effect on supplier ratings will depend on Ford’s ability to stem its market share losses, which will drive 2007 production levels, according to S&P.

The rating agency said the suppliers it placed on CreditWatch have some combination of significant sales to Ford, vulnerable liquidity positions, or credit profiles already weak for their ratings. “Some will have to contend with the Ford cuts while also trying to manage higher energy and raw material costs, significant new-product launches, and their own internal restructuring activities,” according to S&P.

While many other auto suppliers not placed on CreditWatch are likely to face similar challenges for the rest of this year, most have greater flexibility within their ratings to withstand the challenges, the agency said.

Separately, Fitch Ratings said on Friday that Ford’s announcement should adversely affect Visteon’s and Lear Corporation’s operating and cash-flow performance for 2006. But Fitch’s Issuer Default Rating (IDR) wouldn’t be affected, according to the rating agency.

Also on Friday, S&P and said that it may cut Ford’s ratings further by the end of September, and Moody’s issued a similar warning.

Fitch, however immediately downgraded the ratings on Ford and Ford Motor Credit, citing “significant production cutbacks in the third and fourth quarter that reflect persistent share losses across key product categories.”