By Mike Colias
Moody's Investors Service cut Ford Motor Co.'s bond rating to junk status, citing weak cash generation and a yearslong restructuring plan that the auto maker is undertaking just as the car market softens globally.
The ratings company on Monday cut Ford's rating one notch to Ba1 from Baa3. Moody's said Ford's cash flow and operating-profit margins have fallen below the its forecasts and noted the auto maker's sharply weaker performance in China, where Ford's sales have plummeted over the last two years, leading to sharp losses.
Still, Moody's said Ford has "a sound balance sheet and liquidity position from which to operate." That is in contrast to the last time Ford's investment rating was under pressure, in the mid-2000s, when Ford was running out of cash. The auto maker had $22.1 billion in cash as of June 30, according to a regulatory filing.
The ratings cut could increase borrowing costs and hurt profit particularly at Ford's lending arm, Ford Motor Credit, which routinely taps debt markets, analysts have said. It also will ramp up pressure on Ford Chief Executive Jim Hackett to boost results from the restructuring and a broader clampdown on costs.
"Ford remains very confident in our plan and progress," Ford said. "As Moody's notes, we are already addressing two of its primary concerns: operating inefficiency and our China business."
Ford has said it was slow to adapt to evolving trends in the China market and allowed its vehicle lineup there to become stale. It has promised an influx of new and redesigned models in a bid to turn around its China business, which lost $1.5 billion last year after years of profit. Losses eased in the first half of this year.
The extra yield, or spread, that investors demand to hold Ford bonds ticked higher after the downgrade. The spread on the company's 5.113% notes due in 2029 traded late Monday at 3.27 percentage points, up from 3.16 percentage points before the downgrade, according to MarketAxess.
The downgrade importantly doesn't mean Ford bonds will drop out of the Bloomberg Barclays investment-grade corporate-bond index. Bonds remain in that index as long as they are rated investment grade by two out of the three major ratings companies, and both S&P Global Ratings and Fitch Ratings both still rate Ford two notches above junk territory.
Ford last year disclosed plans for an $11 billion restructuring that it said would last as long as five years. The effort began in earnest in the first half of this year, as Ford outlined plans to close plants and cut thousands of factory workers in Europe and South America, where the bulk of the restructuring will occur.
The company has said it would refocus its operations in those markets to concentrate on more profitable business lines, such as commercial vans. In May, Ford also said it would cut thousands of salaried workers as part of a "global redesign" that Mr. Hackett has said would make the company more nimble and faster to respond to new technologies disrupting the industry, such as electric and self-driving cars.
Moody's said Ford has a good record of overhauling operations. "Nevertheless, the scope of this restructuring plan is unprecedentedly large and challenging," it said.
--Sam Goldfarb contributed to this article.
Write to Mike Colias at Mike.Colias@wsj.com