Ford’s return to investment-grade status has pulled about $67 billion out of the junk-bond market

That comes after S&P Global Ratings upgraded Ford Motor Co.’s rating to BBB- late Monday, restoring it to investment grade after it was lowered into junk in 2020. Ford Credit, the company’s finance arm, was not included in the upgrade.

Fitch already returned its rating on Ford to investment grade in September, while Moody’s continues to rate it as speculative grade. The company needs two of the three ratings agencies to deem it investment grade to fully return it to that status.

S&P’s move coming right after weaker-than-expected quarterly earnings and uncertainty about its recent deal with the UAW surprised investors. The company’s electric vehicle business had an adjusted loss of $1.3 billion, which was wider than Wall Street was expecting, as it warned that consumers interested in EVs are “unwilling” to pay the vehicles’ premium prices. The company paused billions of long-term investment in EVs due to that disconnect.

S&P said it expects the car maker’s EBITDA margins to exceed its target of 8% and that it would have adequate cushion in 2024 and 2025 given strong momentum in its commercial vehicle franchise and gradual cost reduction.

The company’s cash balance of about $29 billion as of Sept. 30, and liquidity of about $51 billion gives it ample leeway to compete in end markets, said the rating agency.

The upgrade “is important to the incremental buyer base for Ford and is a positive for investment-grade bond demand, but they also face the same risks around the cycle, their fundamental EV risk, and what the contract will mean in 2024 earnings,” said Glenn Reynolds, founder and editor of Macro4Micro, and founder and former CEO of research firm CreditSights.

The challenge for Ford and rival General Motors Co.
GM,
+1.81%
alike from here is the balancing act of where they deploy their cash with such major increases in their UAW-based expense structure, he said.

“The plans for Ford around dividend policies or buying back shares face some new priority challenges across EVs and shareholders. The UAW just “insisted” (via strikes) that they are now a higher priority than they were under the last collective bargaining deal,” he said.

As for U.S. high yield, Ford was “more of an index distortion” than a major influence on core high-yield, classic investors.

“But there will be rebalancing periods underway for those funds that had index constraints and needed to have a slice to the formerly largest issuer in the index,” he said.

The following chart shows Ford’s maturity stack. The company has a lot of debt that matures in the next few years, peaking at about $14 billion in 2026. It will now be able to refinance at lower rates and tap deeper pools of capital.

The next chart shows the total outstanding debt that is now investment grade.

Ford’s stock
F,
+1.46%,
meanwhile, was up 1.2% Wednesday, but has fallen 15% in the year to date, while the S&P 500
SPX
has gained 9%.

See now: Ford Motor’s credit restored to investment grade after S&P upgrade