October 21, 2019

There have been repeated warnings (by me and others) to avoid weak or troubled businesses with highly leveraged balance sheets.

Such firms were favorites of value seekers, but more and more of these companies are being rated as “junk” by rating agencies. They’re among the first to fall as the boom comes to an end.

Many of these firms are iconic American businesses. They include General Electric (GE), J.C. Penny, General Motors (GM), and more.

The latest huge company to join the junk bunch is Ford.

Moody’s Investor Services cut Ford to junk status on doubts CEO Jim Hackett’s turnaround plan will deliver cash and earnings quickly enough. The downgrade is due to the automaker’s cash flow and profit margins being below expectations and the likelihood they’ll stay weak.

The reason this is such a big deal is because Ford is one of the largest issuers of corporate bonds outside the financial sector. Junk bonds are not eligible for institutional investment dollars. However, Ford is safe.

That’s because two of the three major ratings agencies must rate a firm above junk to be included in institutional bond indexes. Only Moody’s has Ford at junk status, while S&P Global and Fitch have it rated as investment grade.

So, Ford debt can remain…for now.

Unfortunately, the other agencies have negative outlooks on Ford, so it could just be a matter of time. If one of them rates it as junk too, institutional investors would have to sell all Ford bonds.

Significant credit market volatility would unfold. It could push as much as $34.5 billion of Ford’s bonds into the high yield index, which is about 3 percent of the entire high yield market.

That’s astounding. Are there any other giants out there turning into junk?

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