Ford Cuts Almost $10 Billion in Debt; Rating Agencies Respond
DEARBORN, Mich. — On Monday, Ford announced that its debt restructuring initiatives will reduce its debt by about $9.9 billion from $25.8 billion. Moreover, the company said this will lower Ford's annual cash interest expense by more than $500 million, which is based on current interest rates.
"By substantially reducing our debt, Ford is taking another step toward creating an exciting, viable enterprise," pointed out Alan Mulally, president and chief executive officer.
"As with our recent agreements with the UAW, Ford continues to lead the industry in taking decisive actions necessary to weather the current downturn and deliver long-term profitable growth," he added.
Basically, Ford decided to use $2.4 billion in cash and 468 million shares of its common stock to reduce its outstanding automotive debt by $9.9 billion from $25.8 billion at the end of 2008.
Ford Motor Credit used $1 billion in cash to buy back $2.2 billion of debt at 47 cents on the dollar, and $1.1 billion in cash to purchase $3.4 billion of unsecured notes.
In addition, $4.3 billion of Ford's 4.25 percent senior convertible notes were tendered by April 3, when a debt restructuring offer closed. Ford said it will use $344 million to pay a cash premium to noteholders who tendered.
Ford borrowed $23 billion in late 2006 secured with much of its remaining assets including the blue oval logo. The automaker made these recent moves in an effort to slash financing costs as sales plummet and credit remains very tight.
Standard & Poor's Responds by Lowering Ford's Ratings
As a result of Ford's moves, Standard & Poor's Ratings Services reported Monday that it has lowered its corporate credit and other ratings on the automaker.
"We lowered the corporate credit rating to 'SD' (selective default) and certain issue ratings to 'D,'" officials indicated.
"The rating actions today are consistent with our previously published intentions. As we stated previously, we consider the completion of the tender offers to be distressed exchanges and, as such, are tantamount to defaults under our criteria," executives added.
"We expect to assign a new corporate credit rating on Ford by mid-April. The new rating will be based on our assessment of the company's new capital structure and liquidity profile, as well as Ford's business prospects and other relevant rating considerations, including our view of the effect of any assistance the U.S. government may provide," according to the company.
As many are aware, Ford is not seeking government loans but has requested a standby credit line of up to $9 billion to protect its liquidity against further market deterioration.
"The tender offers will reduce debt and lower interest costs, and Ford has stated that annual interest savings will be more than $500 million," said Robert Schulz, Standard & Poor's credit analyst.
"However, even with this debt reduction, our preliminary expectation is that the new corporate credit rating will likely not be higher than the 'CCC' category initially because we believe Ford's fundamental business risks remain unchanged for at least the rest of 2009 and perhaps longer: most notably, deteriorating vehicle demand globally and the substantial execution risk of the ongoing restructuring," he continued.
The company went on to note that the counterparty credit ratings and issue-level ratings on Ford Credit (CCC+/Negative) and FCE Bank PLC (B-/Negative) remain unchanged.
"We expect the differential between the issuer credit ratings on Ford and Ford Credit to be temporary because we still consider Ford Credit's default risk to be indistinguishable from that of its parent, in accordance with our criteria on captive finance subsidiaries," analysts explained.
Fitch Says Move Positive, But Concerns Remain
Meanwhile, Fitch Ratings said Ford's move is a "positive step in managing the company's liability structure, but does not currently impact the company's rating or outlook."
"The reduction in unsecured debt decreases the company's interest costs at the price of a moderate amount of liquidity ($2.4 billion). Liquidity, however, remains a clear concern over the next 18 months. The repurchase also cements losses incurred by investors on the unsecured debt that has been tendered," officials reported.
The company indicated that the results of the repurchase will allow Ford to realize the benefits under a new UAW cost-saving agreement, including the option to fund up to 50 percent of the company's VEBA obligation with equity.
"The interests of Ford's debt and equity holders are aligned in the current environment, facilitating Ford's continued willingness to use equity to fund or reduce liabilities," executives said. "Ford's ability to maintain its current market capitalization could result in further similar actions.
"In contrast to GM, Ford's debt repurchase represents actual debt reduction, whereas the GM reduction in unsecured debt, if achieved, will achieve little debt reduction due to the incremental government loans that could be put in place," according to Fitch.
Officials went on to say that the shrinking of Ford Credit's balance sheet and efforts on behalf of the federal government to improve the availability of retail financing through the Term Asset-Backed Securities Loan Facility program have benefited Ford's ability to utilize available capital and liquidity at Ford Credit to effect the debt repurchase program.
"However, lease and floor-plan financing will remain a challenge," executives stressed. "Ford will remain under severe operating stress through at least 2009 due to continued growth in unemployment, weak consumer confidence and the impact of the credit crisis on consumers and the capital markets.
"Liquidity appears adequate through 2009, potentially assisted by moderate asset sales. Cost reductions and improvement in industry sales levels in 2010 will be necessary to avoid having liquidity reaching minimum required operating levels. Negative cash flow will persist due to operating losses, restructuring costs and working capital requirements, although at more moderate levels than in 2008. The results of the federal government's decision on providing aid to GM and Chrysler could also impact the ability of suppliers to remain in production and solvent. Fitch currently recognizes Ford's ability to steer a course independent of government aid as a positive factor," Fitch concluded.