By on June 26, 2009

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.

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14 Comments on “Will Ford Need Another Debt-For-Equity Swap?...”


  • avatar
    lw

    It all comes down to the cash flow now. If word gets out about the product liability issues, GM and Chrysler will have big problems. This could be a MAJOR boost to Ford’s cash flow and make all these worries go away.

    Two identical cars could be next to each other on a lot. Car #1 was assembled pre bankruptcy and car #2 was assembled post bankruptcy. How do you know? You gonna call 1-800-CHYRSLER and have them tell you?

  • avatar

    Which is like saying you’ve got the nicest Camaro in the trailer park.

    This is a tremendous line! I love it. I’m going to use it in future conversations, giving credit to Mr. Niedermeyer. Genius. Brilliant.

    I then laughed a second time…wondering to myself how many TTAC readers we would lose because it too closely resembles their reality. pfffft

  • avatar

    A projected four times its EBITDA in debt? Talk about walking on a tightrope and hoping the crowd below doesn’t start throwing stuff at you.

    On the plus side, I’ve never seen a 2005-2009 Mustang body kit look so awesome. Thanks for that.

  • avatar
    By-Tor

    I think it’s more: Did you buy your Gov’t Motors/Fiatsler car after they “emerged from bankruptcy?” rather than the build date of the car.

    So I’m screwed for liability with my ’08 Wrangler because I purchased it pre-bailout, but if I bought one off the lot today I’d be able to sue Fiatsler.

    Ridiculous.

  • avatar
    crackers

    If Ford ever does need a bailout, being the last to the table is going to be a big problem for them. The public and politicians are already fed up with the current bailouts and may not be willing to be so accommodating to Ford. The company that did the most to stay independent may end up paying the highest price.

  • avatar
    guyincognito

    @ lw,

    “If word gets out about the product liability issues, GM and Chrysler will have big problems. This could be a MAJOR boost to Ford’s cash flow and make all these worries go away.”

    Alternatively, if fire sales from Chrysler and GM accelerate, this could be a major drain on Ford’s cash flow and make all these worries magnified, sooner.

  • avatar
    Matt51

    “Which is like saying you’ve got the nicest Camaro in the trailer park. ”

    Good stuff!

    Yes, all of the shriveling three are doomed unless they change their ways. Ford is just as f***ed up as GM and Chrysler. Ford management is clueless, they just happened to borrow a lot of dough before the downturn. The ONLY Found on Road Dead product I will miss – The Mustang. The rest of Fix or Repair Daily can disappear, and I would never miss them.

    I will keep my Mustang. Would anyone like to buy my 02 Towncar? It does qualify for cash for clunkers.

  • avatar
    bomberpete

    Is that Iacocca in the picture? When did he come “back” to Ford? Wasn’t he rallying the sullen troops at CereChrysBust just a year ago?

    I know, he’s the Mustang’s “father.”

  • avatar
    fincar1

    “On the plus side, I’ve never seen a 2005-2009 Mustang body kit look so awesome. Thanks for that.”

    Sajeev, I disagree. I don’t understand these body kits lately that make the bottom of the car look a foot fatter. The Mustang greenhouse already isn’t any too big for the car. At least this one is painted the same color as the car.

  • avatar
    RobertSD

    I don’t think this is new news. We’ve known since media outlets reported on Ford’s last swap that they would need to do another major and perhaps some minor ones. Ford had stated during their share sale in May, I believe, that they would use the markets “opportunistically” to raise capital and swap debt.

    I think one of the areas that we should be looking for Ford’s survival is what they would have done had the gov’t not leant them the money from the DoE. Could they have retooled – would it have delayed things? Would that have forced their hand early? What’s Ford cash situation? Can you *afford* to work opportunistically?

    If debtholders are confident in you, you can work around large payments like Ford’s bonds coming due in 2011 – but they will be looking hard not just at profiability, but at cash flow. And that’s where the news should be over the next few months… how bad is Ford hemmoraging and is it product related (because their cadence IS strong over the next 12-18 months and will be expensive) or is the business simply unable to cope.

  • avatar
    baldheadeddork

    RobertSD gets it. If Ford is profitable in 2011 and has shown notable improvement in market share, they’ll be able to refinance as much of their debt as they need. The 2:1 rule is great for a normal period, but this isn’t normal.

    “Nicest Camaro in the trailer park” is a cute expression, but it’s really lazy thinking.

    Is GM going to be stronger that Ford because it will only have a gross debt to EBITDA of 1.5:1 when it comes out of bankruptcy? That’s insane. The loss of Vauxhall/Opel is going to cost GM a massive amount in revenues and earnings, and in markets where they can share the development costs of new models and technology. Plus they’re still going to be dragging around the dead weight of Buick and GMC even after the restructuring. GM will need a lot of things to go its way or in ten years they will be like Chrysler before the Daimler merger.

    If Fiat had succeeded in winning Opel I’d feel a lot better about Chrysler’s future, but without them Fiat will have to spend a lot of time and money filling out its lineup to be a major player in the US market. There’s nothing in the Fiat line to fill Chrysler’s desperate need for a new midsize and large car, and Dodge absolutely has to get a new midsize truck that people want to buy.

    Are the major import brands positioned to make a big expansion of their market share? Toyota isn’t. They’re losing a huge amount of money, too, and their product line is the weakest I’ve ever seen it. Honda is strong, but they’re going to remain conservative with the range of their product line and the size of their dealer network, and that means they won’t challenge Ford for third in the US market anytime soon. Nissan? Anyone think they’ll go from seven to ten percent market share in the next five years? Hyundai is the only one poised for a big jump in market share, but if/when they double their share in the next five years they’ll still be at half of where Ford is right now.

    That’s your trailer park. I think Ford looks pretty damn good in that environment. They’ve got good new products almost across the board, their quality is up significantly, EcoBoost is going to be an attractive and profitable compromise between a regular powertrain and a hybrid if gasoline continues climbing north of $3 a gallon, and they have done a good job of cutting their operating costs. I don’t think they’ll have a lot of long-lasting goodwill because they didn’t take a bailout, but I don’t think it matters, either. Their products and fundamentals are strong enough to position them for strong growth as the car market begins to recover.

  • avatar
    King Bojack

    If they can pull off the debt swaps and their creditors are ok with who gives a shit? Current shareholders may in the short run but the better financial position because of such will be better off in the long run.

  • avatar
    Matt51

    “EcoBoost” – a pathetic joke. Adding a turbo isn’t anything new, and won’t save the Titanic as it sinks. Sell Ford shares short. Ford can’t compete with Kia, or Mazda, or Honda, or Nissan, or GM, or maybe even Chrysler.
    Ford is bringing nothing new to the market to help them turn around. Focus? Fusion? Taurus? Any Lincoln or Mercury product? Even the latest Ram is rated higher than F150. Massive debt, inferior product, nothing much “new” besides “EcoBoost”. The crash is coming, we won’t have long to wait. They fired too many engineers in Dearborn, they really resemble Chrysler.
    The “loss” of Vauxhall/Opel is good for GM. They are dumping their high cost plants. GMC is not dead weight. They sell a lot of product.

  • avatar
    King Bojack

    Matt51:

    Ford’s increasing marketshare (no matter the reason) begs to differ with your entire opinion of the company.


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