Will Ford Need Another Debt-For-Equity Swap?

Ford has been benefiting heavily from “good kid syndrome” lately. You know how it goes, as long as your behavior is marginally better than your sibling’s, you’re the good kid. Just ask the self-styled Autoextremist.

I believe that Ford will emerge as the largest and most profitable U.S. automaker and stay that way for the foreseeable future. They have the strongest management team (led by ex-Boeing executive Alan Mulally who is simply one of the best who has ever worked in this business), they have sensational products here and on the way (their new product cadence is extremely impressive and rivals that of any automaker in the business), and they are demonstrating signs of real momentum in an absolutely dreadful market. I expect Ford to be a global force to be reckoned with in this business for years to come.

Mr. Delorenzo isn’t wrong, per se. Ford’s management and products look downright promising . . . compared to the other Detroit firms. Which is like saying you’ve got the nicest Camaro in the trailer park. Meanwhile, far from the oracles of product cadence and “real momentum,” people are looking at Ford’s numbers, and the words “global force to be reckoned with” aren’t flowing off any of their keyboards.

“We are concerned that the company’s leverage may reach unsustainable levels,” Kirk Ludtke of CRT Capital Group tells Reuters. “It seems likely that Ford will need to de-lever its balance sheet by pursuing additional equity and/or debt exchanges.” Ouch. And the irony is that Ford’s recently approved government retooling loan is actually adding to Ford’s overleverage (if at a discount). JP Morgan figures the government loans will push Ford’s gross debt levels to around four times its EBITDA. And in the words of the JP Morgan report, “auto companies should not be leveraged more than 2 times.” Who knew?

But the looming threat is a $10 billion credit facility which matures in 2011, just in time for Ford’s projected return to profitability. But if another debt-for-equity-swap is in the offing, it might not go as well the second time. Ludtke gives Ford stock a “sell” rating, calling it “overvalued” at Street Insider. According to the analysis, Ford will burn $18.4 billion in the next three years. Which means the company will have to raise $7 billion in additional capital. Or, heaven forfend, take a bailout.