Rating Action Commentary
ֳ Affirms Ford Otosan at 'BB+'; Outlook Stable
Fri 04 Apr, 2025 - 2:10 AM ET
ֳ - Barcelona - 04 Apr 2025: ֳ has affirmed Ford Otomotiv Sanayi A.S.'s (Ford Otosan) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. We have also affirmed its senior unsecured ratings at 'BB+'.
The affirmation reflects our view that Ford Otosan's Standalone Credit Profile (SCP) has weakened to 'bb' from 'bb+' on weaker sales in export and domestic markets leading to higher than expected leverage. The IDR benefits from a one-notch uplift reflecting the application of our Parent and Subsidiary Linkage (PSL) criteria, in particular the investment guarantee scheme provided by Ford Motor Company (FMC, BBB-/Stable) to Ford Otosan to recover capex over the product cycle.
The Stable Outlook reflects our expectation that Ford Otosan will reduce EBITDA gross leverage to below 3.0x by end-2026 and that its links with FMC are unchanged.
Key Rating Drivers
Higher Leverage, FMC Support: We believe the uncertain market conditions in Europe and Turkiye could pressure Ford Otosan's SCP over the next 12-18 months after a weaker than expected performance in 2024. We forecast its EBITDA net leverage will remain above 2.0x over the next 24 months, above the previous negative rating sensitivity, driving the downward revision of the SCP. Ford Otosan's IDR incorporates a one-notch uplift from the SCP because we see medium operational and strategic incentives for FMC to support Ford Otosan, despite the lack of debt guarantees or cross-default clauses.
Investment Guarantee Scheme: As part of its contract manufacturing agreement, FMC provides Ford Otosan with an investment guarantee that secures the investment recovery on contractual volume regardless of actual sales volumes and enables Ford Otosan to recover upfront capex over the planned product cycle. The scheme also entails a cost-plus pricing mechanism that incorporates full pass-through of production expenses and a profit mark-up. The investment guarantee scheme effectively serves as a floor for Ford Otosan's revenue and earnings and offers some protection from a market downturn, evidenced by the resilient performance throughout the pandemic.
Cost Inflation in Turkiye: ֳ expects Ford Otosan to pass through inflated production costs in Turkiye in relation to export volumes, reflected in higher unit sale prices. However, it will have to absorb the component from domestic sales and incremental non-production associated expenses. ֳ expects an EBITDA margin of 6.5% in 2025, down from its previously assumed 7.4%, reflecting the spiraling non-production expense and domestic market stress, but still comfortable for the rating.
Strategic Importance for Ford: ֳ believes that Ford Otosan is strategically important for its joint venture (JV) parent FMC, producing 76% of Ford's light commercial vehicle (LCV) unit sales and one-third of passenger cars (PCs) in Europe, and providing a material cost advantage largely due to cheaper labour in Turkiye and Romania. Ford Otosan is likely to gain more importance as FMC is reducing its manufacturing sites in Europe. Ford Otosan also plays a pivotal role in FMC's global LCV and electrification strategy. It will manufacture six of FMC's nine electric models, including E-Transit and E-Custom. The flagship LCVs are set to be a key pillar of its electric vehicle arm.
Intensified Competition in Domestic Market: The domestic auto market in Turkiye has had excess stock and price cuts, reflecting the effect of general security regulation since end-August 2024 and Chinese new entrants. Although the competition from overseas brands has moderated against the spiked tariffs imposed on imported cars in the near term, Chinese automakers are actively exploring opportunities to localise manufacturing capabilities. The lack of auto loan credit and political turmoil in the Turkish market poses additional downside risk on the demand side, which we expect to weigh on Ford Otosan's short-term profitability.
Resilient LCV Export Volume: Ford Otosan's van export reached 384,000 in 2024, up 24.7% from 308,000 in 2023. Although below our prior expectation, this outperformed the broad European market, which saw van registration growth of 6.5% while regional production was down by 5%, demonstrating the leading position of Ford-branded LCVs. The new Custom and Courier are the biggest contributors to export volume growth, and we expect average capacity utilisation to remain above 70% over the forecast horizon.
Scale, Diversification Constrain Rating: We consider Ford Otosan small compared with European vehicle manufacturers including Volkswagen AG (VW; A-/Stable) and Mercedes-Benz Group AG (A/Stable), which feature much broader spectrums of vehicle types, brands, and models and are well-diversified geographically. With expected production capacity above 900,000 by 2025, Ford Otosan is among the top producers compared with the LCV/van segments of Renault, Stellantis N.V. (BBB/Stable), and VW.
Country Ceiling Not Limiting Factor: Ford Otosan's IDR is not limited by a Country Ceiling because we apply the Romanian Country Ceiling of 'BBB+' instead of Turkiye's (BB-) where the issuer is legally based, reflecting its multi-country operations. This stems from our estimate that Romania-originated EBITDA in euros from the contract manufacturing agreement with FMC (euro-denominated export sales) is more than sufficient to cover euro and US dollar interest expenses.
Peer Analysis
Ford Otosan's business profile is characterised by geographical and product concentration. The size compares small to higher-rated original equipment manufacturers (OEMs) but the LCV production capacity matches or surpasses peers such as Mercedes-Benz Vans or Renault's LCV segment.
The issuer has no exposure to Asia or the US. However, we do not consider this a major rating constraint. Its financial profile is on par with low investment-grade rated LCV manufacturers and passenger car OEMs. We forecast an EBIT margin of around 6% for Ford Otosan in the medium term, which is strong for its rating and similar to that of FMC and VW. The heavy investment cycle in new models pushed EBITDA leverage to above 3.0x, which is higher than peers and above investment-grade medians in our sector criteria. We expect leverage to improve with the production ramp-up.
Key Assumptions
- Annual export unit sales reaching 670,000 in 2025
- EBITDA margins trending down toward 7% by 2028 on production growth
- Capex in line with investment guarantee scheme, down as share of revenues compared to recent years
- 2025 net-working-capital unwinding driven by receivables collection
- Dividend pay-out ratio at 50%
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Negative rating action on FMC or adverse change to contractual sales to FMC
- EBITDA margin sustained below 4%
- EBITDA gross leverage sustainably above 3.0x
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Strengthening of legal incentives for FMC to support Ford Otosan
- We could revise the SCP up if EBITDA gross leverage was sustained below 2.5x and EBITDA margin above 6%
Liquidity and Debt Structure
Ford Otosan had TRY7.3 billion of available cash as of end-2024, after ֳ's adjustment for restricted cash. Management targets maintaining cash and credit commitments to meet 21 days of working capital outflows. The average receivable collection time at Turkish and Romanian plants are 14 days and 30 days, respectively, with export receivables solely from Ford Europe.
For domestic sales, a direct debit system is used for sales via dealers to mitigate credit risk. Ford Otosan uses letters of credit and trade lines for export sales and has a EUR100 million unused committed line and EUR120 million factoring agreement available for working capital needs. We expect negative FCF over the rating horizon, reflecting ongoing capex and dividend payments.
Ford Otosan's debt structure comprises term and syndicated loans and a Eurobond. Most maturities fall between 2026 and 2029. 35% of Ford Otosan's debt at end-2024 was short term, similar to many corporates in Turkiye. We expect short-term bank lines in Turkiye to remain available despite the liquidity squeeze resulting from the FX control, supported by resilient export volumes and strong relationships with foreign and domestic banks. The high hard currency receivable collection rates support euro-denominated interest payments on international borrowings, mitigating foreign-exchange risks.
Issuer Profile
Ford Otosan is a Turkish automotive manufacturing company that is specialised in light vehicle production, with leading market shares in Europe. The company is a JV between Koc Holding (41%) and FMC (41%), the remaining shares are free float.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
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ESG Considerations
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Ford Otomotiv Sanayi A.S. | EU Issued, UK Endorsed |