Posted by: David Kiley on March 4, 2009
Ford Motor Co. said today it will eliminate up to $10.4 billion of its debt by offering debtholders cash and stock instead, as the automaker continues to restructure amid a severe automotive sales downturn.
The Dearborn, Mich., automaker and its financial arm are putting up $2.2 billion in cash and about 500 million shares of stock to entice holders of bonds and secured-term debt. The company said Wednesday it is restructuring the debt to reduce its costs and remain competitive, and it still does not intend to seek government loans.
General Motors Corp. and Chrysler LLC also are trying to swap debt for equity as a requirement of the $17.4 billion in government loans they have received.
For about three months, onlookers have been wondering what Ford was going to do to cut its debt serving costs to remain competitive with GM as it got huge “cram-downs” on its unsecured debt. If GM gets a 30 “haircut” from bond holders down to 30 cents or 35 cents on the dollar, it would cut its annual debt service costs by around $2 billion a year. That would be a pretty big cost advantage assuming GM actually is alive next year.
Ford has already struck a deal with the UAW ahead of GM and Chrysler that will allow it to swap up to 50% of its obligation to the UAW and the Voluntary Employee Benefit Association. And now, it appears it has a solution to take a big bite out of its long term debt and debt servicing costs ahead of its rivals.
The only real loser in this scheme are shareholders whose value gets further diluted. But shareholders take a risk when they invest, and the writing has been on the wall for sometime with regard to the share prices of Ford and GM.
The goal of these moves is simple. Just as CEO Alan Mulally sold off Aston Martin, Jaguar and Land Rover before the market turned sour and buyers disappeared, Ford is taking care of its restructuring business under the most advantageous conditions and timing. Not uner duress and with the government’s gun to its head.
Should the economy deteriorate to the point where Ford needs to tap $13 billion in Federal credit lines, I suspect lawmakers and the U.S. Treasury will line up to write the check to Mr. Ford and Mr. Mulally.