After the closing bell on Tuesday, Moody's increased its rating on Ford's (NYSE:F) debt to Baa3, giving the Dearborn, Michigan automaker investment grade status for the first time since 2005. Moody's is the second ratings agency to boost Ford's credit rating, following Fitch back in April. As a result, Ford can now reclaim much of the assets it put up as collateral back in 2006.
When CEO Alan Mulally took over the top job at Ford, he mortgaged much of the useful assets to give the company enough capital to try to revamp its operations. It came at a time that allowed Ford to avoid going bankrupt and accepting government funds. Now, with the second ratings agency (the third being Standard and Poors) giving its stamp of approval of investment grade debt, Ford is able to retrieve much of those assets it used as collateral. Some of the assets that the Company put up include the blue oval, and the Mustang and F-150 brand names.
The decision helped Ford avoid bankruptcy, but it prevented it from shedding billions dollars of debt similar to the way General Motors (NYSE:GM) and Chrysler did. Ford had $16.6 billion in automotive debt still on its balance sheet at the end of the first quarter, but several years of strong profits also gave its auto unit $23 billion in cash, giving it a positive cash position.
"The key factor in our considering an investment-grade rating for Ford was whether or not the company would be able to sustain its strong performance. We concluded that the improvements Ford has made are likely to be lasting," said Bruce Clark, senior vice president with Moody's, in a statement.
Ford's stock is down 30% over the past year despite strong earnings growth and pricing power. The stock has missed the Street's earnings consensus in three of the past four quarters; however, the Company trades with a trailing twelve month PE ratio of 2.15, compared to the industry average of 12.98. Additionally, its forward PE of 6.00 is below the industry average of 10.24. The move to investment grade will also allow the Company to refinance its $16.6 billion of debt at more attractive interest rates. All these are combining to form a compelling investment proposition for Ford.
Disclosure: I am long F.