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Fixing the Engine Trouble at Ford Credit


Ford Motor Credit Co. has long been a reliable cash cow for the No. 2 auto maker. Until, that is, former Chairman Donald Winkler set out a few years ago to turn it into "a global auto finance superpower." Ford Credit boldly plunged into myriad services such as home mortgages and online stock trading, as well as aggressive lending to car buyers with poor credit.

Two years later, Ford Motor Co.'s (F) finance subsidiary has become something of, well, an Edsel. Bad loans have forced it to nearly double its provision for credit losses; in the fourth quarter, the unit lost $297 million--the first quarterly loss in its 42-year history. Its credit rating has suffered. Says Burnham Securities Inc. auto analyst David Healy: "They lost a lot of discipline. They wrote a lot of bad paper."

Can Ford Credit be fixed? That's the question facing Greg Smith, a 29-year company veteran who has led the finance unit since Winkler's ouster in December, and is charged with leading its overhaul. His marching orders are simple: Make money and support Ford sales. Period. No more online deals or risky cutting-edge stuff. "We're focusing on doing things that we know we can do extremely well," says Smith.

Sounds simple, but the low-key Smith faces a daunting task. An engineer before he joined Ford's financial-services group in 1993, he has to dump the money-losers, streamline operations, collect on existing loans, and tighten standards on new lending, among other things.

Ford Credit's grandiose dreams of growth were part of former Chief Executive Jacques Nasser's plans for diversifying Ford Motor into an array of consumer businesses. Nasser hired Winkler from Bank One Corp. (ONE) in late 1999. Under him, Ford Credit's receivables shot up 29%, from $161 billion in 1999 to $208 billion last year, thanks largely to forays into lending to car buyers with poor credit. Earnings rose 42% in two years, to $1.5 billion in 2000, but tumbled to $839 million in last year's recession as fringe borrowers defaulted.

Smith has abandoned Winkler's goal of increasing Ford Credit's portfolio to $245 billion by 2006, aiming instead to hold it near the current $206 billion. He's dismantling Fairlane Credit, a Colorado subprime lender. Smith also curbed risky used-car lending, which does little to aid Ford's new-car business, as well as lending to buyers of competitors' vehicles. And he's winding down a mortgage-lending venture with Wells Fargo & Co. (WFC)

The changes may take a while. Average loan maturities are at 42 months, so Merrill Lynch & Co. analyst John A. Casesa figures it will take Smith about three years to burn off bad loans. Meantime, the company is experimenting with periodic credit-agency checks of riskier borrowers.

Still, some analysts worry that Ford Credit's $3.3 billion of loan-loss reserves at the end of 2001 aren't generous enough. Scott Sprinzen, a Standard & Poor's managing director, notes that the company's reserves are "a thin 1.4 times" its $2.3 billion of credit losses, compared with roughly 2.0 at other consumer-finance companies. "They don't have much cushion against losses," he says. Counters Smith: "We're comfortable" at the current coverage level.

Comfortable or not, money is still tight. The finance unit skipped its quarterly dividend payments to the parent for the last two quarters and won't say when they'll resume. The dividend payments totaled $400 million in the first three quarters of 2001. Indeed, Ford Motor contributed $700 million in capital to its subsidiary in January. Still, Wall Street was mildly encouraged by a first-quarter profit of $256 million versus an $800 million loss for the parent. That lagged the year-earlier quarter but was a marked improvement from 2001's fourth quarter. One positive sign: Losses as a percentage of receivables in the U.S., although historically high, slowed to 1.4% in the first quarter, from 1.76% late last year.

Not dramatic--but an indication that it may be pulling out of the breakdown lane. Ford Credit may well become consistent if unexciting again. By Kathleen Kerwin in Detroit


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