Ford: Good Response from Debt Buyback, Debt Downgraded (Bloomberg)

Ford Reduces Debt 38% With Buybacks of Bonds, Loans (Update3)


By Keith Naughton and Caroline Salas

April 6 (Bloomberg) -- Ford Motor Co., slashing costs to stay off government aid, said it trimmed $9.9 billion of borrowings as the company completed its largest debt restructuring.

The transactions, which reduce automotive debt by 8 percent, will “substantially strengthen Ford’s balance sheet,” the second-biggest U.S. automaker said today in a statement. Ford had sought to erase as much as $11.3 billion in notes and loans in a three-pronged effort. The company’s shares rose to their highest close in six months.

“It gives them more time, and the timing was really good because it would be a lot more difficult if they borrowed money from the government,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which holds Ford bonds. “It’s always a great move when you can buy back your debt at 30 cents on the dollar.”

Ford on March 4 offered investors the chance to accept discounted payouts for the notes and loans, trimming debt costs as the automaker tries to stem losses that totaled $30 billion in the past three years. The Dearborn, Michigan-based company has avoided U.S. assistance, while General Motors Corp. and Chrysler LLC survive on $17.4 billion in federal loans.

The company, which lost a record $14.7 billion last year, said it will save more than $500 million in annual interest costs. The automaker and its Ford Motor Credit Co. finance unit will use $2.4 billion in cash and 468 million Ford Motor shares to repurchase the debt. The shares are valued at $1.76 billion based on today’s closing price.

Shares Rise

Ford rose 52 cents, or 16 percent, to $3.77 at 4:15 p.m. in New York Stock Exchange composite trading, the highest close since Oct. 3. The shares have gained 64 percent this year.

The automaker has enough liquidity left to remain self- sufficient and not seek government aid, Treasurer Neil Schloss said in an interview.

Should the U.S. auto market, which is at a 27-year-low, not recover, Ford is better shape to seek government aid, JPMorgan auto analyst Himanshu Patel in New York said in a research note.

“The exchange could be aimed in part at mollifying the concerns of various stakeholders and a possible precursor to eventual government aid,” said Patel, who has a “neutral” rating on Ford shares. “Ford has now accomplished a fair amount of what was asked of GM and Chrysler.”

Schloss said the debt restructuring “met all our expectations.” Shelly Lombard, an analyst for bond researcher Gimme Credit in New York, said he had expected more than $11 billion in debt to be retired.

Rating Lowered
Standard & Poor’s cut Ford’s corporate credit rating today to SD, or selective default, and said it would assign a new rating by mid-April based on the automaker’s balance sheet and business prospects. S&P said the new rating will likely not be higher than about CCC, or 8 grades below investment status. The previous rating was CC, or 10 steps into junk.
Fitch Ratings said the debt transaction are a “positive step in managing the company’s liability structure” and left Ford’s ratings unchanged. Fitch and Lombard at Gimme Credit said they were concerned that Ford access to funds is declining.

“With poor operating results now expected through 2009, Ford’s liquidity is becoming strained,” Lombard wrote today in a note. “Although Ford’s future still depends on a recovery in auto sales, the debt restructuring and union contract changes have decreased the chances of a Ford bankruptcy.”

Notes Rise

The automaker’s $579 million of 4.25 percent convertible notes due in 2036 gained 6 cents to 46.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities yield about 10 percent.

Ford Credit’s $3.5 billion of 7.25 percent notes due in 2011 were unchanged at 72 cents on the dollar, according to Trace. They yield 22.2 percent, or 21.3 percentage points more than similar-maturity Treasuries.

The automaker’s bonds gained 36.6 percent in March after Ford asked investors to swap their debt, according to index data compiled by Merrill Lynch & Co. That compares with a 1.9 percent return for GM securities, Merrill data show.
The automaker, which consumed $21.2 billion in cash last year, is tapping some of its available funds to finance the buybacks. Ford is using $344 million of its $13.4 billion in automotive cash, Schloss said. Ford Credit is spending $2.1 billion of its $18 billion in funds, he said.

‘Decisive Actions’

“Ford continues to lead the industry in taking the decisive actions necessary to weather the current downturn,” Chief Executive Officer Alan Mulally said in a statement.

The final phase of Ford’s offer, which ended April 3, included a cash-and-stock proposal valued at about 28 cents on the dollar to induce holders of $4.9 billion in convertible bonds to trade for the company’s common shares. Bondholders claimed $4.3 billion of that proposal, an 88 percent take rate that the company considered oversubscribed, Schloss said.

Ford also offered to spend $1.3 billion to buy back unsecured non-convertible debt. Holders claimed $1.1 billion of that amount, retiring $3.4 billion in debt, the company said.

Ford on March 23 also said an offer to repurchase its term loans was oversubscribed, prompting the company’s finance arm to double to $1 billion the cash it planned spend on the so-called Dutch auction. Ford said today that it will buy $2.2 billion of the principal amount of the debt, at 47 percent of face value.

The automaker had $25.8 billion of debt at the end of 2008 after borrowing $23.4 billion in late 2006, giving it more cash than GM or Chrysler. As collateral for that financing, Ford put up all major assets, including its headquarters and blue oval logo.

U.S. automakers are struggling after industry sales of cars and light trucks fell to a 16-year low in 2008 and declined 38 percent in this year’s first three months. Ford’s U.S. sales fell 41 percent in March.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: April 6, 2009 16:34 EDT