I’ve written more than once about my conviction–and consequent worry–that we’re headed for a global credit crunch sometime in the next three to four years. I’m looking for the kind of Minsky Moment that sees financial markets go into chaos as global liquidity temporarily dries up.
But I haven’t yet pulled out of the financial markets because three to four years is a long time in stock market terms. So I’ve decided to invest as if this is a late credit cycle market and to keep searching for signs that the credit crunch is getting closer.
The sinking credit rating on Ford Motor’s debt is exactly that kind of sign. It doesn’t say that the credit crunch is here, but it does argue that it is coming and that it is getting closer.
Ford’s debt is currently rated one-step above junk bond status by Moody’s Investors Service and two steps above junk by Standard & Poor’s.
This is a big deal–Ford is one of the 15 biggest issues of corporate debt in the United States outside the financial sector. The company has more than $150 billion of short- and long-term debt outstanding.
Right now bond buyers are asking for junk bond yields to hold Ford bonds due in 2026.
Part of the problem is worry over the effect of the Trump administration’s higher tariffs on steel. Another piece is concern over slowing auto sales in general (and especially in China) and at Ford in particular. Wall Street hasn’t heard enough details about the restructuring plan the company announced in July to give it confidence that the company can turn around its profit problems. (The restructuring will cost about $11 billion, Ford has said.)
Ford avoided bankruptcy in the aftermath of the Global Financial Crisis (unlike General Motors and Fiat Chrysler) but the company did lose its investment-grade rating and was forced to sell debt secured by its assets to raise capital. The company reclaimed its investment-grade rating in 2012.
Ford isn’t in danger of bankruptcy now and the company’s $35 billion in cash as of September 30 is a major factor in Ford keeping its credit rating out of junk bond territory.
But if you’re looking for canaries in the coal mind to watch for the first signs of danger, Ford looks like a good candidate.