It Was Inevitable: Ford Can't Dodge the Financial Bullet

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There was always a sweet bit of fiction in the notion that Ford (F) was so much better financially than GM (GM) or Chrysler that it could weather the global economic downturn no matter how brutal it turned. All of that magical thinking came to an end as the No.2 American car company said it would have to "restructure" its balance sheet, which has always been short-hand for finding a way to remain in business.

Once domestic vehicle sales began to decrease 30% per month, as they did beginning last fall, and then the rate increased to 40% or more the last three months, there was no way that Ford could finance its losses over the next year. The news that Toyota (TM) and Honda (HMC) might seek assistance from the Japanese government meant that not a single car company in the world would get by on its own. (Read about the CEOs behind Detroit's Big Three.)

Ford proposed a complex plan to retire nearly 40% of its long-term obligations. The company wants to restructure its debt through a combination of a conversion offer by Ford and cash tender offers by Ford Credit. The car company will attempt to get holders of $4.88 billion in convertible notes due in 2036 to move their holdings into the common stock of the company. The debt carries an interest rate of 4.25%. At the same time, Ford Credit will begin a $1.3 billion cash tender offer to purchase certain series of Ford's outstanding unsecured, nonconvertible debt and has also begun a separate $500 million cash tender offer to purchase Ford's senior secured term loan debt. Ford will also defer interest payments on another class of convertible preferred.

The transformation of Ford's debt load looks more complicated than launching the Space Shuttle, and it is. But, if the plans work, the car company will have dispensed with well over a third of its debt.

If it works, that is. Ford would like the markets to view this as a series of decisions made from a position of strength. The fact that it is not asking for money from the government would appear to make that true. In reality, holders of Ford's paper would probably rather bargain with the company now than with the government a year from now when every U.S. auto firm will need money again.

And, the opportunity to deal with Ford directly as opposed dealing with the government is at the core of Ford's decisions. With its sales down nearly 50%, there is no way for it to make it to the end of the year with its current debt structure. What the company is not saying is that it may not be able to make it another six months without outside help. There are only so many costs that can be cut for Ford to remain a viable global car company.

What is left unsaid in the news from Ford is that it is academic whether aid for the car companies comes from their private debt holders or the government. The UAW will bend to another round of concessions. At the rate at which The Big Three probably lost money last month, the industry could need $50 billion or more in financial support between now and the end of this year. That assumes that car sales drop at a rate of only 40%.

What Ford is trying to do in the private sector and GM and Chrysler are doing with the government may look entirely different today, but the paths will converge as the market for vehicles gets worse. At that point private capital will choose to opt out of the equation entirely. It is not willing to take that kind of risk.

Douglas A. McIntyre

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