By on January 12, 2010
On the upswing (courtesy:thestar.blogs.com)

Despite Ford’s surging stock price, new models and rising customer confidence there’s always been that one bone of contention which had divided peoples’ opinion: debt. $35 billion of it. Though they’ve tried to restructure it, selling new shares and raising cash throughout 2009, it’s still a problem. But apparently it’s becoming less of a problem. ABC news report that Fitch Ratings upgraded their assessment of the risk of Ford defaulting on its debt obligations, basing their optimistic view on a better economic environment, the company’s stronger margins, increased market share and cash position. Oh yes, and a small matter of $5.9b in federal DOE retooling loans [full Fitch release here]. Ford’s Credit unit also received a hearty slap on the back from Fitch because of its improving access to capital, as its rating was raised from “CCC” to “B-”. But let’s not get carried away. While this is a positive step in Alan Mulally’s vision of a sustainable Ford, the rating still qualifies Ford debt as non-investment grade.

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13 Comments on “Debt Rating Upgrade Fuels Ford Resurgence...”


  • avatar
    Disaster

    I read the actual debt Ford holds is closer to 150 billion when you include Ford finance in the mix…and I don’t know a justification to ignore it.  Despite some nice efforts I suspect Ford’s debt will be it’s undoing….that and Koreans, Chinese and Indians.  The American manufacturers are going to continue to be squeezed out on the quality side from the Japanese, as Hyundai and the up and coming new Asian manufacturers eat up the profit margins on the low end.  The big question is; Will the U.S. gov’t have enough money left…or will there be any popular support, for bailing Ford out in a couple years.

    http://seekingalpha.com/article/90183-the-ford-debt-disaster-continues

    • 0 avatar
      Telegraph Road

      FMCC’s nonautomotive debt bears considerably less risk to investors than automotive debt, as it supported by a reliable receivables stream of loan payments.

    • 0 avatar
      Robert.Walter

      Coming into Carmageddon both GM and Ford had similar debt loads, on the order of 135G and 120G USD respectively (figures are appx from memory, correction is welcomed), these figures represent total debt for both the automotive  and the 100%-owned captive fiance company-side (GMAC and FMCC) of the business.

      In this period, I recall GM’s approach to the issue was we need to sell-off a majority share of GMAC to ensure GMAC will have access to cheap capital and being owned by GM works against this (keep in mind, this was also a cover-story for GM trying to free-up capital to avoid insolvency), and Ford’s approach was to repeat that very little of their debt was due in the next 5 – 10 years, and, in fact, the majority of the debt was due in 30 years.  (IIRC, this is before Ford went out and secured their 23G USD last-ditch-go-for-broke loan; so the 150G USD debt figure seems reasonable.)

      GMAC has been a bottomless pit for gov’t capital injections (in part due to having been the wrong side of sour mortgages, a finance segment I don’t think FMCC participated in after selling off the Associates.)

      I don’t have enough detail knowledge on this topic, but it sure would be interesting if someone else could compare and contrast the GM and Ford debt loads and put them in context for us.

    • 0 avatar
      rnc

      People keep saying that Ford’s $23 billion in loans were what saved them (and they were), but they forget that GM issued $30 billion in bonds during the same time frame (this was to fund VEBA and unfunded pension obligations).  GM also sold close to $60 billion in assets during the 90′s and 00′s (EDS $10b, hughes $30b, GMAC $19b, EM $2b), all of those proceeds also went into funded pension/healthcare obligations.  This goes back to the loans vs. bonds example above.  The banks would never have loaned ford the money if they didn’t think they would make it (yes ford leveraged all of it’s assets, but do vacant car factories have any real value?).  No bank would have loaned GM the money, that is why they issued bonds (whose investors would not have the insight into GM’s internals that the banks had into Ford’s).  I think that is the best way of understanding the difference in GM’s and Ford’s comparible (financial) health b4 the great recession.

    • 0 avatar
      Telegraph Road

      Yes GMAC has indeed been a bottomless pit and most of that is due to its ResCap mortgage business.  Because Ford’s financial situation was more dire than GM’s when the truck and SUV business began to decline, it more quickly shed non-core businesses to focus on supporting the auto brands.  Some of the refocus away from non-core businesses also came when Jac Nasser (a Jack Welch wannabe) and FMCC CEO Don Winkler (a former banker) were fired by Bill Ford Jr.  But even Ford Credit’s auto lending operations have been consistently more profitable than GMAC’s, owing to better risk management

  • avatar
    Sinistermisterman

    Ok, can anyone explain it to simple old me. Who does Ford owe $35 billion to? Is Ford repaying any of it as we speak? And how long would it take Ford to get back in the black?

    • 0 avatar
      baldheadeddork

      Ford owes $35 billion to investors who have bought the bonds they’ve issued over the years. Some of this debt goes back ten years or more, but mostly people are talking about the huge borrowing spree that Alan Mulally went on soon after becoming CEO three years ago.
       
      When he came in he foresaw that there was a strong likelihood of a recession in the near future and if it happened it would be very difficult for a car maker like Ford to borrow money. So he mortgaged every the company owned – including their headquarters building and logo – to build up their cash reserves. And it worked. If Mulally had not done this there is a very high probability that Ford would have run out of cash last winter or spring and been unable to pay its suppliers, and we would have had all three American automakers in bankruptcy.

  • avatar
    Telegraph Road

    Fitch was the last of the three major debt raters (with Moody’s, S&P) to move Ford and FMCC out of the highly-speculative category.  And it is keeping the outlook positive, indicating potential further upgrades.  With a $39B market cap today (from under $6B a year ago), fixing the balance sheet through debt buy-backs and equity issuances is now possible.

  • avatar
    rnc

    Ford will probably be in the black next year.  $22 billion is owed to banks and other financial institutions, $7 to the VEBA and $6 to the DOE.  The DOE loan doesn’t require payments for years and more than likely is interest free.  The bank loans can be refinanced over and over again (it’s what the banks want, they make money on interest not principle), Ford has been paying down (they paid $2 billion early in the 3rd Q) and refinancing on a regular basis (this is why the ratings are so important from CCC to B will probably save them 1% as they refinance the debt related to finance.)  Barring a repeat of Nasser and an economic collapse worse than last year, Ford will be fine. 

  • avatar
    baldheadeddork

    @ Telegraph Road: I have to disagree with your interpretation of a B- rating. Anything below BBB- (Fitch/S&P) is considered junk or non-investment grade, and most references that I’m familiar with do classify a B- as highly speculative. A C grade means there is an imminent risk of default, so going from CCC to B- is a big step, but I think most potential buyers would still consider Ford debt highly speculative.
     
    That isn’t to downplay the importance of this change by Fitch, which I think Cammy did in his post. This is very good news for Ford. It will reduce the interest they have to offer, it substantially cuts the cost of counter-party insurance for buyers, and it opens them to a much larger pool of potential buyers. Pension funds and insurance companies are required by law to only buy investment-grade securities, but bond funds have internal rules that limit the amount of sub-investment grade debt they can invest in, and how much they can acquire at a given level.
     
    All of it means that Ford’s costs of servicing this debt are going to go down, and when you’re talking about $35 billion lowering the cost by even fifty basis points (I suspect it is going to be more) is going to add up to a lot of money.

    • 0 avatar
      Telegraph Road

      You may be correct.  I was merely quoting the WSJ article:
       
      “Fitch Ratings became the last of the three major ratings companies to move Ford Motor Co. (F) and its credit unit out of highly speculative territory as the auto maker’s results continue to outpace the industry.”
       
      http://online.wsj.com/article/BT-CO-20100111-710441.html?mod=WSJ_latestheadlines

  • avatar
    lw

    This is a game of small moves…
    - Stock price UP
    - Cost to refi/insure debt is dropping
    - VEBA is done, which improves cash flow
    - Car and Truck of the year
    - Gaining market share
    - New products…
     
    Ford is doing great….  I just hope they are ready for interest rates to go up…  In the next round of the recession we get high interest rates or currency devaluation or some of both.


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