Ford proposes restructuring $10B in debt

Thursday, March 5, 2009

Carmaker seeks to strengthen balance sheet, says it does not need federal loan.
Bryce G. Hoffman / The Detroit News

DEARBORN -- Ford Motor Co. outlined plans Wednesday to restructure up to $10.4 billion in corporate debt to reduce interest expenses, strengthen its balance sheet and, most importantly, comply with the provisions of a tentative agreement it reached last month with the United Auto Workers.

The move answers a burning question on Wall Street: How will Ford match bondholder concessions rivals General Motors Corp. and Chrysler LLC are required to make as part of their federal loan agreements?

"We don't intend to take government loans," Ford spokesman Mark Truby said. "But we want to participate in the overall restructuring that is going on in the industry. Debt is a key piece of that."

Though GM and Chrysler are still haggling with union leaders, Ford reached an agreement with the UAW last month that would allow the Dearborn automaker to cover up to half its contribution to a union-run retiree health care fund with stock instead of cash -- saving Ford billions of dollars. In addition, the deal allows Ford to cut bonuses and make important changes to work rules that it says are necessary to be competitive with foreign rivals.

The agreement with the UAW still must be ratified by workers, but Ford said Wednesday that it is contingent on the company winning concessions from bondholders similar to those the government demanded of GM and Chrysler -- specifically, restructuring two-thirds of their unsecured debt.

Ford's unsecured debt totals about $9 billion.

"Both sides win in this," said Mark Oline, an analyst at Fitch Ratings. He said Ford is using the fact that it has more cash than its domestic competitors to strike a deal with bondholders and satisfy the union's demands for "shared sacrifice" by all parties.

"This is going to be a much more difficult play for General Motors," Oline said.

The UAW contract amendment will go into effect as soon as it is ratified, according to sources familiar with the situation, but Ford will have to continue working with bondholders if the deals announced Wednesday fail to get enough takers.

Nearly $21 billion of Ford's $25.8 billion in outstanding debt is affected by the offerings. The company has set aside $2.2 billion in cash -- $400 million in automotive cash and $1.8 billion from Ford Credit -- enough to repurchase or convert up $10.4 billion of that.

Specifically, the automaker has launched an offer to convert its 4.25 percent senior convertible notes due Dec. 15, 2036, that will pay bondholders $80 in cash for each $1,000 in face value to convert those notes into stock. Bondholders would receive 108 Ford shares for each $1,000 note.

Up to $4.9 billion in bonds could be converted. The company said the move would not significantly dilute existing stockholders' shares because most of the shares that would go to those who convert were set aside when the bonds were issued.

Additionally, Ford Motor Credit issued a $1.3 billion cash tender offer for unsecured, non-convertible debt securities. Under the terms of this deal, the company will pay the majority of these bondholders 30 cents on the dollar for their notes, which are trading at about 20 cents on the dollar, provided they sign up by March 19. After that, most will get 27 cents on the dollar for their bonds. This has the potential to retire up to $4.2 billion in unsecured debt.

Both offers expire April 3.

In addition, Ford Credit is issuing another $500 million cash tender offer for its senior unsecured term loan debt. This will be handled through an auction process and could retire another $1.3 billion in debt, depending on the auction price. This offer expires on March 26.

"The debt restructuring plan we are announcing today is a critical step in Ford's overall transformation," CEO Alan Mulally said in a statement. "We are continuing to work with all of our stakeholders -- including employees, dealers and suppliers -- to secure Ford's future in this difficult economic environment."

Moody's Investors Service downgraded Ford's debt, saying the move increases the probability of default.

"Moody's views the exchange and tender offers as a distressed exchange," the firm said in a note to investors, though it also said the move could strengthen Ford's ratings once the deal is done. "It is ... possible that Ford's rating outlook will be changed to 'stable' from 'negative' to reflect the financial and capital structure benefits resulting from the conversion and tender transactions, as well as agreements with the UAW."

Other ratings agencies could view the move as a default on Ford's bonds, as it is buying them back for less than face value. Fitch, however, reaffirmed its current rating of Ford's debt.

"We don't view this as a default, because it's voluntary," Oline said. "If the investors turn down the exchange offer, then Ford's balance sheet would be worse off. But anytime you reduce debt, that's a good thing."