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Fitch Ratings Affirms Ford, Ford Credit, Hertz & Related Entities.

Business Editors

CHICAGO--(BUSINESS WIRE)--April 28, 2003

Fitch Ratings has affirmed the senior debt ratings of Ford Motor Company (Ford), Ford Motor Credit Company (FMCC), The Hertz Corp. (Hertz) and their respective subsidiaries at 'BBB+' and commercial paper at 'F2'. The Rating Outlook for all entities remains Negative.

The affirmation is based upon Ford's solid liquidity position and progress in meeting expectations under its revitalization plan. First-quarter 2003 (Q1 2003) results indicate that Ford is on track in terms of operating cash flow and resulting cash levels. Operating results reflected solid share gains and price retention, although Ford will be hard-pressed to retain pricing in a softening sales environment. Fitch recognizes that recent performance and liquidity have been aided by strong industry volumes and extensive tax rebates, but Ford has utilized the time afforded by these factors to accelerate execution of the plan. Although difficult work remains to be done in areas such as quality, vehicle design efficiency, and overall product cost, initial signs of success are appearing. Ford's market share gains (0.5% on a year-over-year basis in Q1 fiscal year (FY) 2003) in a down industry sales environment are an initial indication of possible product momentum. Concerns remain centered on Ford's continued ability to execute the plan in the current environment, Ford's future pension/health care obligations, the upcoming United Autoworkers (UAW) contract negotiation and new product introductions (particularly the F-150).

The ratings for Ford are strongly influenced by the company's high degree of liquidity, with $26.6 billion of gross cash (including $2.2 billion of VEBA) and net cash of $7.6 billion. Additionally, Ford Motor Company maintains $7.1 billion of committed global credit lines. This degree of liquidity provides significant flexibility in managing the company's significant pension and OPEB obligations, as well as economic and competitive cycles. Ford's extended maturity schedule provides additional flexibility.

Ford's rating is contingent on its ability to right-size its cost structure and remain competitive in an environment of severe price competition, industry over-capacity and escalating health care and pension costs. The success of the plan will require not just material and supplier cost reductions, but the overhaul of major processes following a period of extensive management changes. Success will also require introducing new products that the market will respond to (such as the recently displayed Mustang prototype) in a cost-efficient way while ensuring significantly better levels of product quality - both areas of weakness in the recent past. Although initial indications are that the product strategy may be working, success will not be determined until 2004 whether or not the product revival has been truly successful. This is due to the fact that many of the most important products (such as the Five Hundred and an updated Explorer) will not be launched until during or after this time and also because it will probably not be clear until early 2004 just how successful the new F-Series launch has been.

Given its current market share and high product costs, Ford will need to continue to address its structural costs. The recent announcement of an additional $1 billion in near-term cost cutting appears achievable given the company's progress in the first quarter of 2003, but will be difficult in light of the rate of escalation in health care costs and the company's upcoming labor negotiations. Even the achievement of substantial cost cuts will not ensure margin retention and enhancement in the current industry pricing and capacity environment. Ford will also need to effectively balance cost goals with the maintenance of positive and substantial progress on the quality front. Recent J.D. Powers surveys, as well as recall frequency and recall cost trends and also warranty cost data, indicate that Ford is making progress in this area.

Fitch views the upcoming labor contracts as a critical juncture for Ford and General Motors, with key issues clearly health care, pensions and job security. Given Ford's capacity situation and its announced intent to close plants, there will have to be some movement off of the previous contract's no plant closure provision. In the area of healthcare, Ford needs to address the burgeoning nature of its union (both active and retired) employee's health care costs much like they have begun to address these costs with the salaried workforce. In the area of pensions, given the competitive pressures that the industry faces, more attention needs to be given to the impact to any proposed benefit increases. Finally, Ford will need to further the trend of obtaining more flexible work rules in order to enable its production facilities to more adequately compete with more flexible competitors.

Ford's underfunded pension position represents an increasing long-term claim on the company's cash flows. At some point, long-term interest rates are expected to rebound and equity markets are likely to achieve positive returns, potentially deferring these claims and making Ford's position even more manageable. Ford's plans, while benefiting from any rebound in interest rates and returns, would also benefit from any potential legislative solution to more closely align the Employee Retirement Income Security Act (ERISA) discount rate (currently 120% of a four year average of the 30-year Treasury) with the Statement of Financial Accounting Standards 87 (which sets the discount rate at a level generally accepted to approximate a AA corporate bond average). This increase in the effective discount rate under ERISA (which could approximate 75-100 bps) would defer Ford's legal funding requirements and provide a clear capital benefit. It is not clear, however, if this legislation will pass and in what form. Over the near term, Ford does not face required cash contributions to its pension plan, but is likely to make continued significant contributions in order to manage its liabilities. Of note, Ford has already contributed $1 billion to its pension plans in 2003. Fitch assesses pension and OPEB liabilities in association with Ford's operating cash flow and existing cash balances. Fitch believes that Ford has more than sufficient liquidity to manage these liabilities over the near-term, while over the long-term operating performance will be the determinant.

Fitch continues to view FMCC as an integral part of Ford, thus the ratings of FMCC and related subsidiaries remain strongly linked to the parent. Along with Ford, FMCC has also made notable progress on its restructuring efforts since the fourth quarter of 2001. Positively, FMCC has curtailed its non-Ford related financings, which should ultimately improve asset quality, however given a net reduction in managed receivables and account seasoning, as well as weak used vehicle prices, reported asset quality measures will not fully reflect any improvement over the near term. Although FMCC has resumed paying dividends to Ford, FMCC should remain within its targeted managed debt/equity range of 13.0 times (x)-14.0x. Moreover, Fitch considers FMCC's capital to be consistent with the current ratings on a risk-adjusted basis. In light of FIN 46 'Consolidation of Variable Interest Entities', FMCC could be required to consolidate its asset backed commercial paper (ABCP) program, FCAR, on its balance sheet. Since Fitch effectively evaluates FMCC's capital on a managed basis, any such change would not have an impact on Fitch's view of leverage.

Fitch continues to believe that FMCC maintains adequate liquidity, enhanced by recent whole-loan transactions. To date, FMCC has executed approximately $7 billion of whole loan transactions. Although Fitch believes that FMCC maintains adequate liquidity, the company's access to unsecured debt markets has noticeably diminished, causing FMCC to rely more heavily on the asset-backed securities (ABS) market to address upcoming maturities of debt. In Fitch's view, the asset-backed securities (ABS) market should remain accessible over the near to intermediate term for FMCC. Fitch's concern regarding greater ABS issuance is the increase in credit enhancement assets on the balance sheet which require greater capital, as well as higher upfront non-cash gain-on-sale revenue recognized. Fitch will carefully monitor gain-on-sale income, particularly in light of the resumption of dividends to the parent company. In addition securitization structures potentially advantage investors in the asset-backed transactions to the detriment of unsecured bondholders.

Given Hertz's status as a wholly-owned subsidiary of Ford, Fitch views the ratings of Hertz to be linked to those of Ford. The rating linkage is further supported by the various agreements between the two companies which include the car supply and joint advertising agreements, as well as the corporate, tax-sharing, credit and facility and loan agreements. In that regard, any change in Ford's ratings would result in a change in the ratings for Hertz. For its part, Hertz is one of Ford's largest customers, ordering more than 200,000 units a year most of which of are program vehicles with buyback guarantees negotiated with Ford. Overall, Hertz has performed reasonably well given the slowdown in business travel and excluding the goodwill writedown taken earlier in the year in early 2002 related to its Hertz Equipment Rental Corp. unit. In the on-airport car rental market, Hertz is the leader in terms of market share. Additionally, its financial profile is superior to that of its direct competition.

Ratings affirmed with Negative Rating Outlook:

Ford Motor Co.

-- Senior debt 'BBB+';

-- Preferred stock 'BBB-';

-- Commercial paper 'F2'.

Ford Motor Credit Co.

-- Senior debt 'BBB+';

-- Commercial paper 'F2'.

FCE Bank PLC

-- Senior debt 'BBB+';

-- Short-term 'F2'.

Ford Credit Canada Ltd.

-- Senior debt 'BBB+';

-- Commercial paper 'F2'.

Ford Credit Australia Ltd.

-- Senior debt 'BBB+';

-- Commercial paper 'F2'.

Ford Credit Co. of New Zealand Ltd.

-- Senior debt 'BBB+';

-- Commercial paper 'F2'.

Ford Capital B.V.

-- Senior debt 'BBB+'.

Ford Motor Credit Co. of Puerto Rico, Inc.

-- Commercial paper 'F2'.

Ford Holdings Inc.

-- Senior debt 'BBB+'.

Ford Motor Co. S.A. de C.V.

-- Senior debt 'BBB+';

-- Short-term 'F2'.

PRIMUS Financial Services (Japan)

-- Senior debt 'BBB+';

-- Short-term 'F2'.

The Hertz Corp

-- Senior debt 'BBB+';

-- Commercial paper 'F2'.

Hertz Canada Ltd.

-- Commercial paper 'F2'.

Hertz Australia Pty. Ltd.

-- Commercial paper 'F2'.

Hertz Finance Centre Plc

-- Commercial paper 'F2'.
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Publication:Business Wire
Geographic Code:1USA
Date:Apr 28, 2003
Words:1646
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