Just hours after being downgraded to one notch above junk (in what would be one of the biggest 'fallen angels' of this cycle) - due to the erosion in Ford’s "global business position and the challenges it will face implementing" its restructuring effort that could rack up $11 billion in the next three to five years - Ford has canceled plans to import a new crossover model from a plant in China, claiming that President Trump’s tariffs compromised the business case for bringing the vehicle to the U.S. market.
As Bloomberg reports, Kumar Galhotra, president of North America, said in a conference call with reporters that Trump’s move to slap China-built autos with an additional levy of 25 percent undermined the profitability of the Focus Active that Ford planned to start shipping into the U.S. about a year from now, adding that the company decided that it wasn’t worth investing more money in a vehicle that it would have sold fewer than 50,000 units a year in the U.S.
“We have to make a judgment call on the profitability of that particular project,” Galhotra said.
“Our viewpoint on Focus Active was that, given the tariffs, obviously our costs would be substantially higher, and the resulting profitability of that product, our resources could be better deployed."
Trump seems like an easy scapegoat for crap management...
Bloomberg points out that canceling the Focus Active is Ford’s latest move in its oft-evolving strategy for global passenger cars. The company had planned to move production of the Focus to Mexico, drawing rebukes from Trump in the lead-up to the 2016 election. Last year, Ford decided to shift production to China, and this year the automaker made the move to eventually stop selling almost all of its passenger cars in the U.S.
So, at the end of the day, we wonder if this is a win for President Trump? His trade war has stopped an American firm from outsourcing production to China?
As we noted previously, Ford is not exactly projecting strength in this latest move.
Commenting on the downgrade, Ford spokesman Brad Carroll said the company has had solid financial results and operating cash flows.
“The company has a strong balance sheet, which provides financial flexibility. We know we can capitalize on our strengths, bolster underperforming products and regions and disposition where we cannot make an appropriate return. We’re confident that as we do, the market will recognize our progress.”
Well, it had a strong balance sheet, not so sure about has, because adding to the income statement "perfect storm" is Ford’s rising debt/EBITDA, which has risen from 2.6x to 3.3x between 2016 and the twelve months ending June 2018.
It goes without saying, that slipping closer to junk status puts Ford at risk of higher borrowing costs, while an outright downgrade to junk would unleash a toxic spiral of surging interest rates at a time when Ford's profitability is sliding fast, forcing the company to issue even more debt to fund its operations, until one day creditors pull the plug.
But here is the bigger problem: Ford - which is now in danger of being a historic "fallen angel" - has more than $80 billion in debt, and would become one of the biggest issuers in the U.S. high-yield bond market if it gets downgraded even one more notch.
Of course, it may not be Ford that catalyzes the crash: as Oaktree warned there is now "a flood of troubled credits topping $1 trillion as rising interest rates overwhelm low-quality loans and bonds."
However, it would be poetic justice if the auto company that avoided bankruptcy during the Global Financial Crisis is the "spark" that - with its downgrade to junk - is the catalyst that unleashes the next bond market crash, as investors finally flee from the $1+ trillion US junk bond market, precipitating a cascade of selling that spreads into investment grade and, eventually, equities.
Which brings us back to the words from Moelis' co-head of restructuring Bill Derrough who in may said that "I do think we're all feeling like where we were back in 2007; there was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."
That time may be almost here.