Ford Reducing Debt (Forbes)

Autos
Ford's Fancy Footwork
Joann Muller, 03.05.09, 6:41 PM ET

DETROIT, MICH. -
You've got to hand it to Ford Motor. The No. 2 U.S. automaker is so far navigating brilliantly through a very dangerous minefield while the fate of its U.S. competitors, General Motors and Chrysler, looks bleaker by the day.

To be sure, Ford is barely healthier than Chrysler and GM, whose auditors said Thursday there is "substantial doubt" about GM's ability to remain in business. But unlike its rivals, Ford so far has not asked for government loans to stay alive. Instead, chief executive Alan Mulally has moved quickly to try to dictate the terms of the industry's painful restructuring--before GM and its government overseers do so.

Ford was first, for instance, to strike a deal with the United Auto Workers union about how to pay for retiree health care. Ford's deal, allowing it to fund up to half its $13.2 billion future liability with stock instead of cash, is likely a model for GM, which is still locked in tough negotiations with the UAW.

Then came Ford's announcement late Wednesday of a tender offer to retire up to 40% of its debt at just 30 cents on the dollar. The offer was shrewdly timed, coming on the eve of a crucial meeting Thursday between President Obama's auto industry task force and a committee representing GM's bondholders.

GM must reduce its $27 billion in debt by two-thirds in order to satisfy terms of the $13.4 billion taxpayer loan it received from the federal government on Dec. 31. Bond analysts say that in exchange for trading their debt for 33 cents on the dollar, GM bondholders want a government guarantee on the new debt (a treasury bond of sorts) and a stake in the reorganized GM.
But with Ford, which is arguably in better financial shape offering less to its own bondholders, that looks unlikely. As a result, GM's debt restructuring effort could be more difficult. GM says it hopes to launch a debt exchange offer by March 31, a government-imposed deadline.

By acting ahead of GM, Ford is trying to limit any competitive advantage GM could gain through a government-dictated restructuring. "It's another stick in GM's side," says Kip Penniman, bond analyst with KDP Investment Advisors. "Ford has essentially set the tone for GM's bondholder negotiations. If Ford's tender offer is relatively successful, it will make it much more difficult for GM's bondholders to receive significantly greater value."

While GM and its bondholders wrangle under government pressure, "Ford is essentially allowing its bondholders to take some money and run," says Gimme Credit analyst Shelly Lombard.

Of course, Ford's offer is voluntary and there's no guarantee enough bondholders will accept the swap by its March 19 preliminary deadline. Some might hold out for a higher offer.

The deal could allow Ford to retire up to $10.4 billion of the $25.8 billion in debt it had as of Dec. 31, saving more than $600 million a year in interest payments. But old debt is already being replaced by new debt. In January, Ford said it would draw down the last $10 billion of its revolving bank credit line. It is also seeking more than $1 billion in loans from the Energy Department to retool its factories to produce fuel-efficient vehicles.

"What this does do," says Penniman, "is it gives Ford a tremendous amount of political good will in the event they have to go back to the government and say, 'We did our best, we reduced debt, we got concessions from the UAW and yet the economy has overwhelmed us.'"

Indeed, like GM and Chrysler, Ford's biggest problem is not its debt burden or its labor costs but the drastic collapse in vehicle sales. Until consumers start buying again, every carmaker is in peril.

See Also:

Ford Finds Dilution A Better Idea Than Bailout

Dead End For General Motors?

U.S. Consumers Not Consuming