Ford, unlike Chrysler in 1990s, balances debt, cash
December 13, 2002
BY HEATHER LANDY AND BILL KOENIG
Ford Motor Co. Chief Executive Officer William Clay Ford Jr.'s new appreciation of cash may have prevented the automaker's bonds, which had traded at junk-bond levels, from falling further.
The world's second-largest automaker has built up a $25 billion cash cushion, almost double the $13 billion held last year. After trading in October at 85 cents on the dollar, below investment grade, Ford's 10-year bonds have recovered to 94 cents.
"One of the lessons I've learned, after having gone through the last few years where we burned through a lot of cash, is cash is important," Ford said in an interview in September.
Ford has more than $20 billion in bonds to repay in each of the next three years and posted a loss of $850 million for the first nine months. With the economy slowing, it can't afford a cut in credit ratings and the higher interest costs that would bring, analysts said. Chrysler took two years to regain investment-grade status after its ratings were cut to junk in 1991 as bloated costs and recession brought a $795 million loss.
Moody's Investors Service cited the cash as a reason for maintaining its ratings on the carmaker's debt last month. Standard & Poor's cut Ford's ratings in October, leaving the company at the second-lowest investment-grade rating because Ford retains "adequate liquidity and financial flexibility."
Not as Bad
"Ford is nowhere nearly as bad as Chrysler was 10 years ago," said analyst Sasha Kamper at Principal Global Investors, which oversees $43 billion of fixed-income assets and owns Ford bonds. "That's why the company amassed this kind of cash, they saw what happened to Chrysler in the last downturn."
The Dearborn, Michigan-based company's shares have also been recovering, with the decline this year narrowing to 38 percent from 55 percent in October. Ford rose 2 cents to $9.70 at 9:31 a.m. in New York Stock Exchange composite trading.
Increased demand for corporate debt in an improving economy, and the lure of high yields on Ford notes, have pushed the price up to about 93.65 cents on the dollar. The gap between yields on the Ford notes and U.S. Treasuries of comparable maturity has narrowed to 4.34 percentage points from 5.5 percentage points, indicating that investors perceive less risk to holding them.
Even with improvement in bond prices, Ford is struggling to cut expenses and cope with a U.S. pension-fund shortfall that doubled to $6.5 billion at the end of September because of losses on investments. Including non-U.S. pension plans, the shortfall is $11.9 billion.
Ford led a decline in U.S. auto sales in November, as domestic producers lost ground to Asian and European imports. Ford's share of the U.S. auto market stood at 21.5 percent through November, down from 23.2 percent a year ago. The figures include the automaker's European-based brands.
The company decided to cut production after a 20 percent decline in November sales as rivals, including General Motors Corp. and Toyota Motor Corp., introduced new truck models to compete with Ford's Explorer and F-150 pickup truck that bring the bulk of its profits. And Ford is struggling with quality problems and recalls of new vehicles, including 11 for its top-selling Focus models.
Ford faces the prospect of higher financing costs as well because Standard & Poor's and Moody's have negative outlooks on the company, meaning its credit ratings are more likely to be lowered than raised in the future.
Ford is the largest contributor to benchmark credit indexes. Even investors who said Ford bonds are attractive said they've been hesitant to buy them because they already have a large concentration of the debt.
With $127 billion in bonds outstanding, Ford is the most debt-laden of the automakers. Its bonds also have the highest yields of any U.S. rival, with the 7.25 percent bond due in 2011 offering more than twice that of the 10-year U.S. Treasury bond. Ford investors get a yield of 8.28 percent compared with 3.94 percent on comparable Treasuries.
Many junk investors, including some who reaped returns of 60 percent or more by betting on Chrysler in the 1990s, are unwilling to make the same bet on Ford. Ford bonds offer smaller interest payments and less room to rally than Chrysler's bonds did a decade ago because Chrysler's bonds dropped as low as 60 cents on the dollar whereas Ford's 10-year bonds never got below 85 cents.
"Chrysler was a much smaller entity," said Dwayne Moyers, who helps manage $500 million of high-yield bonds at SMH Capital Advisors in Fort Worth, Texas. "It was easier to maneuver, easier to change than what Ford is going to be. Ford bonds aren't trading that cheaply yet, and you don't really have a catalyst for them to move up quickly the way Chrysler did."
Ford has turned to alternative sources of capital. The company sold $3 billion in vehicle loans to Bear Stearns Cos. in November and plans to make additional loan sales.
Like Chrysler a decade ago, Ford is also selling debt backed by assets, promising dedicated revenue from loans on cars and trucks to cover payments on interest and principal.
"Chrysler's access to the asset-backed market was completely unimpaired throughout the 1990s," said Dan Ilany, a fixed-income analyst at Bear Stearns Cos. "That's an important thing to point out when people worry about Ford's alternate sources of liquidity."
Ford sold 733 million euros ($732 million) of floating-rate notes backed by Spanish and Italian auto loans this month and plans to sell $7 billion to $12 billion in unsecured debt.
Backed by Assets
Using asset-backed financing, the carmaker can save about 7 percentage points in interest, or $70 million per $1 billion borrowed, said Scott Colbert, who owns Ford debt in the $6.5 billion he helps manage at Commerce Bank in St. Louis.
Access to the $1.2 trillion asset-backed market gives Ford "a lot more financing flexibility," said Zane Brown, director of fixed income at Lord Abbett & Co., which oversees $17 billion of bonds and holds "a small amount" of Ford in some of its smaller high-yield portfolios.
Selling more than $20 billion in asset-backed debt next year may trigger a cut in Ford's debt ratings because it would leave fewer assets and less protection for Ford's other bondholders, ABN Amro Holding NV analyst Steven Zhu said in a note to clients.
Ford's "over reliance" on asset-backed bonds leaves the company at a disadvantage to General Motors Corp. and Chrysler, said Zhu, who considers the need for funding for Ford's loans to car buyers to be a bigger concern than the pension shortfall.
As part of DaimlerChrysler AG, Chrysler is profitable again and no longer depends on asset-backed financing.
"It takes away the availability of assets," Dieter Zetsche, chief executive officer of the Chrysler unit said in an interview last month. "It doesn't make you more attractive."
Chrysler became profitable in 1992 after cost cuts and sales of minivans and Jeeps improved. When Daimler-Benz AG bought Chrysler Corp. for $36 billion in 1998, the No. 3 automaker was the most profitable of the U.S. rivals. Chrysler stumbled back into losses for seven quarters, including the first three months of this year. The company is expected to be profitable for all of 2002.
Ford is unlikely to repeat the quick turnaround managed by Chrysler because some of the models it's counting on for increased sales, including the Five Hundred sedan and Freestyle vehicle that blends aspects of a car and sport-utility, won't be out until 2004. And the company can't close some plants until after it completes negotiations with the United Auto Workers union in the second half of 2003. As a result, Ford still needs funding to carry the company through its restructuring.
The company depleted cash between 1999 and 2001 by buying Volvo AB's car unit for $6.45 billion in 1999 and Land Rover from Bayerische Motoren Werke AG for $2.73 billion in 2000. In 2000, the company paid out $5.7 billion to investors and expanded its outstanding shares to satisfy investors after stock values fell. Ford also has spent $2.1 billion to replace Firestone-brand tires on its vehicles after officials investigated 271 highway deaths linked to Explorers with tires from the Bridgestone Corp. unit.
Now Bill Ford is working to refill the company's cash accounts since taking over as chief executive officer last year.
In January, Ford announced a plan to cut 35,000 jobs and close five plants by 2005 to help reduce costs by $9 billion. The automaker said it is implementing another $1 billion in cost cuts, without specifying what is being cut. Bill Ford's goal is to generate $7 billion in annual pretax profit by 2005.
Earlier this year, Ford sold convertible preferred stock and tried to cut costs to increase its cash.
"We don't know where the world is headed in the next year," Ford said in September. "Cash for us is a competitive advantage."
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My next Ford.....