You wouldn’t credit it

Last month, two of the world’s most important credit reference agencies, Moody’s and Standard & Poor (S&P), downgraded both Ford and Ford Motor Credit. Now, this may seem pretty esoteric stuff if you are grappling with the day-to-day running of a business car fleet. But, in the longer term, it could have a significant effect on how (and where) you source your cars.

Credit rating by major agencies affects the ability of all companies, even major banks, to borrow money. This, in turn, affects the rates and terms available to their customers – you, me, Ford Motor Company itself, Ford dealers and some (but not all) Ford contract hire operators.

The assessment by S&P would make pretty depressing reading if it was your company they were talking about. For starters, Ford Motor’s consolidated debt now totals $153bn and the financial outlook is described as “negative” – that’s bad.

S&P credit analyst Robert Schulz said: “The downgrade reflects the seemingly relentless deterioration in Ford’s North America automotive operations which are now expected to remain unprofitable until at least 2009.”

He went on to warn: “The ratings could be lowered if further setbacks, whether industry related or Ford specific, were to increase the use of cash, delay cost savings from the latest restructuring efforts or constrict liquidity.”

Ford Motor Credit now has an S&P long-term rating of ‘B’ and a short-term rating of ‘B-3’. In plain English that means S&P thinks the company can meet its current financial commitments but any adverse turn in economic or business conditions “will likely impair” its ability to meet its commitments.

It is worth saying at this stage that Ford Credit Europe is actually in a better position than its parent company, being rated B+ and B-3. Meanwhile GMAC, the recently separated finance arm of General Motors, has a long-term rating of ‘BB’, which is one grade better.

But, for comparison, take a look at the credit ratings of the three international banks that own the UK’s largest contract hire operators: HBOS, LloydsTSB and Royal Bank of Scotland. They are all rated ‘AA’ (one below the highest ‘AAA’ rating) and their financial outlook is described as “stable”.

Last week I was talking about this to George Grant, until recently head of Bank of Scotland Vehicle Finance and now leading the bank’s motor finance division. He was quite clear that Bank of Scotland can now borrow money on better terms than either Ford or General Motors.

“We’re getting more and more new car finance business,” he told me. “The re-rating of Ford Credit is going to have a massive effect on the market and may affect their ability to invest in new systems and processes for the future.”

Before there is mass panic among those of you with Fords on contract hire, I should point out that Ford Business Partner cars in the UK have been funded by Lex (owned by HBOS) since early 2004 and most Ford Lease Business Partner cars in Europe are now funded by ALD (owned by Societe Generale). So Ford in Europe has already taken significant steps to protect its position.

Meanwhile, General Motors has sold a large share of GMAC, which owns Masterlease in the UK, to a US-based investor group in the hope of raising both cash and its credit rating. As a consequence, Masterlease is concentrating on its core business and getting out of ventures such as the retail car supermarket chain, Carland.

What we have, in effect, is Ford and General Motors, the two largest business car providers, getting out of the car finance business because they can no longer compete. The car manufacturing business was dragging down their ability to be good bankers – the next few years will see which divisions survive.

And it might just be worth questioning the wisdom of European carmakers, such as DaimlerChrysler and Volkswagen, who now have a strategic policy of increasing their banking activities.