Fitch Ratings upgraded Ford Motor Co to investment grade on Tuesday, a key step that could lower borrowing costs and brings the second-largest U.S. automaker closer to reclaiming its Blue Oval insignia.

The upgrade reflects Ford's improved balance sheet since its near-collapse in 2006, Fitch said. Since then, Ford lowered its break-even point, reduced its pension risk and revamped its vehicle lineup as part of its One Ford turnaround plan.

Fitch is the first of the three major ratings agencies to upgrade Ford to investment grade, ending a seven-year period in which Ford debt was rated as junk.

Fitch believes that the work that has been accomplished has put the company in a solid position to withstand the significant cyclical and secular pressures faced by the global auto industry, the ratings agency said in a release.

Chief Executive Alan Mulally mortgaged most of Ford's assets, including factories and its iconic Blue Oval, in 2006 to borrow more than $23 billion (14 billion pounds) for the company's turnaround. Should a second ratings agency upgrade Ford to investment grade, the collateral underpinning of those loans will be released.

Reclaiming the logo, which is stamped on the grills of Ford cars and trucks, would be a major symbolic milestone for the automaker. Executives have described the goal as a rallying cry within Ford's headquarters.

The Fitch move also sets Ford up for lower borrowing costs. Once another agency upgrades Ford's credit rating, the interest rate on its $9.3 billion revolver will fall by a quarter of a percentage point, Reuters Loan Pricing Corp data shows.

Fitch upgraded Ford and its captive finance arm, Ford Motor Credit, to BBB- from BB+. Its outlook on both is stable.

Chief Financial Officer Bob Shanks called the move an important proof point validating the Ford's business plan.

Our One Ford plan includes achieving strong investment grade ratings and maintaining 'investment grade' throughout an economic cycle, Shanks said in a statement.

Mulally's mandate, which has been the centrepiece of Ford's strategy since 2006, centres on unifying the automaker's once-disconnected business units, and taking advantage of its scale to drive down costs and build a global brand.

MOODY'S, S&P EXPECTED TO FOLLOW SUIT

The last time Ford was rated as investment grade by all three major ratings agencies was in May 2005.

The Fitch upgrade came earlier than some projected and analysts expect Moody's Investors Service and Standard and Poor's Ratings Service will follow suit this year.

Morgan Stanley analyst Adam Jonas predicts Moody's will upgrade Ford within three months and S&P will do the same after six months. Moody's and S&P each rate Ford a single notch below investment grade.

We maintain our view that mid-2012 is a realistic timeframe for Ford to achieve investment grade ratings at all three rating agencies, Barclays Capital analyst Brian Johnson said.

Once all three agencies give Ford investment grade rating, Ford Credit can obtain lower borrowing rates that it could pass on to consumers, Morningstar analyst David Whiston said.

It will allow Ford to sell more cars, Whiston said.

In keeping with standard practice in the industry, Ford Credit lends money to consumers and dealers, often at a lower interest rate than it can obtain for itself. These rates can be as low as zero percent and help boost vehicle sales. Upgrades by Moody's, Fitch and S&P would lower the cost of this strategy.

The Ford upgrade could also benefit the automaker's larger Detroit rival General Motors Co , which Fitch rates two notches below investment grade, Barclays' Johnson said.

It is unlikely that Fitch will upgrade GM to investment grade immediately, he wrote in a note. The more likely result is a one-notch upgrade over the coming months ... followed by a move to investment grade later in 2012.

BACK FROM THE BRINK

Since the downturn, Ford has invested more heavily in cars, such as its Focus compact car and Fusion midsize sedan, to satisfy consumers' growing demand for fuel-efficient vehicles.

The new Focus car can better compete against rivals including Honda Motor Co Ltd's <7267.T> Civic and Toyota Motor Corp's <7203.T> Corolla, Fitch said.

Ford's more balanced product portfolio has put it in a better position to weather the likely mix shifts to smaller vehicles typically seen in economic downturns, Fitch said.

Still, Ford also faces the risk of slower-than-expected global demand for vehicles, particularly in Europe, and a relatively weak position in Asia, Fitch said.

Recessionary conditions in Western Europe and a slowdown in growth in China and India also pose a potential problem for Ford. High energy prices, high unemployment and a weak housing market present a risk to U.S. auto demand.

Ford would still burn a substantial amount of cash in a downturn, Fitch said, but Ford's stockpile of cash and access to liquidity would help the automaker withstand its cash burn. Ford ended 2011 with a net cash position of nearly $10 billion.

The automaker is expected to report first-quarter earnings on Friday.

(Additional reporting by Bernie Woodall in Detroit and Caleb Frazier from Thomson Reuters Loan Pricing Corp; Editing by Chizu Nomiyama, James Dalgleish, Matthew Lewis and Bernard Orr)