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Ford to pay highest-ever bond yields


If you want to know what American investors think of Ford Motor Co., take a look at the Ford Motor Credit Co. 9.75% notes due in 2010: The world's third-largest automaker is so enfeebled that it will wind up paying the highest interest rate -- and accept the lowest price -- on any Ford bond sold in the United States in the last century.

Ford, which invented assembly-line manufacturing in 1913, is offering investors $2.5 billion of bonds coming due in 2010 and 2011 that pay annual interest of as much as 10.6%, plus $1.3 billion in cash, in exchange for bonds that start maturing in October and have coupons as low as 4.95%. Companies that Standard & Poor's says are near default get lower rates, Merrill Lynch & Co. index data show.

"You wouldn't have imagined that Ford would ever have to pay more than 10%," said Thomas Flaherty, who will swap some Ford Motor Credit Co. bonds in the $25 billion of fixed-income assets he handles at Aberdeen Asset Management in Philadelphia.

Ford is at the mercy of bondholders, who are due $57 billion over the next five years, after a drop in its share of the U.S. car market and the costs of cutting workers and closing plants led to the biggest quarterly loss since 2001.

By exchanging bonds, Dearborn-based Ford can hold on to some of its $21.2 billion in cash while designing new cars to win sales from Japanese rivals Toyota Motor Corp. and Nissan Motor Co.

"This is a very expensive way to do it," Flaherty said earlier this month in an interview.

The highest interest rate Ford paid on a U.S. bond was 10.35% when it sold $30 million of 10-year notes in 1987.

The bond exchange will increase Ford's interest costs by about $90 million a year. It's worth it to avoid the danger that investors would demand even higher rates in a public bond sale, said Glenn Reynolds, the head of New York-based research firm CreditSights Inc.

Selling bonds is "a little painful for us," Kenneth Kent, Ford Credit's chief financial officer, said at an American Financial Services Association conference in Baltimore last week. "You can't last forever in this business at these ratings and these spreads."

Ford lost its investment-grade credit rating a year ago and now has $121 billion of junk-rated debt.
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