US:Ford burns cash reserves
Ford burns cash reserves
Weakened, it could sell part of credit arm
BY JUSTIN HYDE
DETROIT FREE PRESS BUSINESS WRITER
WASHINGTON -- For years, Ford Motor Co. has tried to ease worries about its long-term finances by pointing to a cash pool, which totaled $23.6 billion at the end of June. But, like an irrigation pond in a drought, demands on Ford's cash are growing just as its supply channels diminish.
Most analysts say that, between its cash cushion and another $6.3 billion in untapped credit, Ford should have plenty of cash to carry out any additional restructuring through the 2007 contract talks with the United Auto Workers. But, they add that if Ford isn't able to stop burning cash in its automotive business, pawning a piece of Ford Credit could become necessary.
Through the second quarter, Ford has burned $1.5 billion in cash, and the automaker has warned that its cash-burn rate would increase for the remainder of the year, thanks to new-model launches and worker buyouts. Ford has not given a specific forecast but reiterated Thursday that it is on track to end 2006 with more than $20 billion, in line with some analysts' estimates that it will burn at least $3 billion in cash over the next six months.
Large automakers need billions of dollars in cash just to pay bills necessary to run the business; Ford plans to spend $7 billion this year alone for developing new products.
Ford executives say they have the cash they need. "We have the capital and the liquidity to pull this off," Ford Chief Financial Officer Don Leclair said.
Despite the cash cushion, credit-rating agencies have pushed Ford's bonds deep into junk status, citing the slow progress in its turnaround and declining market share. Moody's Investor Service says that, while Ford has sizable cash reserves, "the company's weak operating and competitive position limits its capacity to absorb additional stress."
Standard & Poor's said Friday that, although Ford is in no danger of default, it could lower its ratings further if "Ford's cash use was to worsen significantly due to further setbacks, whether Ford-specific or stemming from market conditions."
Ford has been able to maintain its cash, even as it sustained sizable losses in its automotive business thanks to payments from Ford Credit, Ford's lending arm, which has accounted for all of Ford's corporate pretax profits since 2000.
But Ford Credit's earnings fell 45% in the second quarter from a year earlier, and its profits have shrunk as higher interest rates and downgrades from credit-rating agencies have raised Ford Credit's costs to borrow money.
Several investors have called on Ford to sell a stake in Ford Credit, just as General Motors Corp. has agreed to sell 51% of General Motors Acceptance Corp. for $15 billion. Citigroup analyst Jon Rogers said Ford Credit's earnings could decline further, and if GMAC revives itself outside of GM, it could put even more pressure on Ford Credit.
"If Ford faced a more serious liquidity crisis, we believe it would follow the GM model and consider a partial or complete sale of its finance arm," said Gimme Credit analyst Craig Hutson.
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My next Ford.....