CHICAGO — In a positive turn, Fitch Ratings announced it has revised its ratings outlook on Ford and Ford Credit from "Negative" to "Stable."

Additionally, the company said the issuer default rating for Ford has been affirmed at "CCC."

Fitch officials explained, "The change in outlook is based on the solid execution of Ford's restructuring program, a competitive product lineup with a healthy level of new and refreshed product introductions over the next several years, realignment of the company's manufacturing footprint and diminished liquidity concerns."

However, executives also said, "A return to positive cash flow is not expected over the next 12 months, but is probable upon the industry reaching more normalized sales levels above 12 million light vehicles."

The company is predicting that sales will reach a higher level of annualized demand in late 2010 or 2011.

"Improvement in the company's outlook and rating will be driven by the pace and mix of the rebound in industry sales, steady execution of the company's product introductions, continued discipline in the company's production/inventory strategy, further margin improvement and competitive access to capital at Ford Credit," officials explained.

"These trends are largely pointing in the right direction, but have been overwhelmed by general economic and industry conditions. The behavior of competitors in production and pricing could also influence the timing of any improvement in the outlook or rating," they added.

Fitch indicated that Ford's product lineup continues to perform will and that the automaker is positioned to either remain stable in market share, or push up this figure, over the next few years as it introduces and refreshes products.

The ratings company also suggested, "Ford's quality improvement has been well-documented and together with Ford's ability to avoid taking government aid, may benefit Ford's near-term retail share.

Fitch gave the following checklist, indicating this is what needs to happen for Ford to receive an upgrade:

-Industry sales rebound to an annual 12 million sales level more quickly than currently forecast.

-Ford's products continue to hold or gain share.

-Inventory management at Ford and the industry allows the automaker to hold or improve product prices.

-A clear path to positive free cash flow is projected.

-Liabilities continue to be managed or addressed, including the maturity of the company's bank agreement.

-Independent access to capital by Ford Credit improves.

However, the ratings company also offered a list of what factors could lead to a downgrade:

-U.S. industry sales revert to further declines in the event of a double-dip recession.

-A market disruption in oil prices which sends gas prices sharply higher and drives consumers away from vehicle purchases.

-A breakdown in the supply chain resulting from further supplier bankruptcies and lack of access to capital, or from dislocations caused by the dissolution of a major competitor.

-Inability of Ford Credit to obtain financing on competitive terms.

Ultimately Fitch said, "Ford has made significant reductions in its fixed cost structure, although step-changes to its head count, wages and benefits have largely been completed. Realization of recent actions should continue through year-end, with a full run rate of savings expected in 2010. Future cost savings will be achieved largely through more standard (but challenging) efficiency and productivity gains, including materials savings.

"Upon completion of the conversion of several truck plants, Ford's manufacturing footprint will be well-aligned with near-term product plans, supporting an expected improvement in efficiency and capacity utilization. New-product introductions and higher volumes through existing assembly plants, plus increased platform sharing, should provide material improvement in operating margins, also aided by the ability to add lower-tier hourly wage earners," the company continued.

A primary driver of operating performance over the near term will be the high-margin large pickup segment, which accounted for 10.4 percent of U.S. light-vehicle unit sales through August and 24 percent of Ford's non-Volvo unit deliveries.

Officials noted that this market suffered a decline of more than 50 percent in production from 2006 levels, and sales volumes remain "mired below replacement demand."

"Demand is expected to recover slowly due to lingering weakness in the housing market, but the potential trough of the housing market should signal improved demand and consolidated margin performance as a result," officials explained.

As of June 30, Ford had cash of approximately $21 billion, with a reduced rate of outflow projected for the second half due to increased production and working capital inflows.

Fitch basically estimates that if the U.S. industry sales rebound only to 11 million light vehicles in 2010, that Ford's cash drain from operations would be $5 billion or less, depending on mix.

"Liquidity in 2009 and into 2010 is expected to benefit from working capital inflows associated with higher production volumes, and modest asset sales. In addition, liquidity will benefit from an expected $5.9 billion in federal government loans under an energy-efficiency program," according to Fitch.

Ford's maturity schedule is centered on the December 2011 maturity of its $10.7 billion bank agreement.

"Given current market conditions in the leveraged finance market, the company's recent performance and the state of Ford's collateral, it is probable that the company could ‘amend and extend' this facility in the existing amount (although at higher pricing). This would mitigate refinancing risk and address the liquidity risks associated with a double-dip recession and the resulting step-down in industry sales," executives highlighted.

Ford executed a voluntary debt exchange in 2009, removing $9.9 billion in debt ($7.7 billion in unsecured debt and $2.2 billion in secured debt) and $500 million in interest costs, Fitch noted. This debt reduction, however, was effectively replaced by the drawdown of its revolving credit facility, the company continued.

Over the past several years, Ford has also completed several equity-for-debt swaps and a straight equity issuance, thereby managing the growth in its liabilities and somewhat moderating the damage caused by severe cash drains, the ratings institution noted.

"Ford's willingness to use equity is likely to continue. The interests of equity and bondholders have recently been very much aligned, as both sides have benefited from the issuance of equity and the boost in liquidity, although it remains to be seen how long this will last," officials said.

Fitch expects that Ford will continue to issue equity over the next 12 months as market conditions permit, and will likely issue equity to finance its VEBA obligations to the full $6.5 billion permitted.

"However, even with periodic equity issuances, any balance sheet improvement over the near term is expected to be modest," executives cautioned.

Although General Motors and Chrysler have realized substantial access to capital from various government actions, Fitch said it does not believe that this represents a competitive disadvantage to Ford from a balance sheet perspective.

To the contrary, Fitch indicated that it views Ford and Ford Credit's periodic access to equity and the debt markets as a distinct competitive advantage.

"Over the longer term, balance sheet strength or deterioration will be driven by operating results, and Fitch views Ford as better-positioned in this respect than its Detroit-based competitors. The retention of Ford Credit remains a positive," the company stated.

Discuss Ford Credit a bit more, Fitch said, "The ability of Ford Credit to finance itself and its customers, independent of government-sponsored programs and at economically competitive rates will be a factor in future upgrades. Fitch has revised Ford Credit's senior debt ratings following changes in Fitch's rating definitions published in March 2009, which suggests a baseline rating of 'B' for a 'CCC' IDR with an 'RR2' Recovery Rating (RR). Fitch continues to believe potential recoveries are at the lower end of the 71-90 percent recovery range.

"In the event of a bankruptcy, unsecured bond recoveries at Ford are expected to be negligible. The senior secured loans are currently rated 'RR1' (90-100 percent recovery), based on a restructured, going-concern North American enterprise value plus certain international operations and joint ventures (particularly those in Latin America and China)," according to officials.

"According to Fitch methodology, an RR of 'RR1' would typically translate to a rating of 'B+'. However, in the event of a stress scenario, recent industry events suggest that the corresponding plunge in asset values would result in less than full recovery, even though Ford's secured borrowings are subject to a borrowing base," they concluded.