Ford Motor Company (NYSE: F) announced today the results of conversion offers of bonds for stock that will reduce the Ford’s Automotive debt by more than $1.9 billion, thereby lowering annualized interest costs by ~$180 million. Including the conversions, a recent $3.6 billion prepayment on VEBA Note B and net debt reductions over the first nine months of 2010, Ford has reduced its Automotive debt by $12.8 billion this year, lowering its annualized interest costs by nearly $1 billion, the company said in a statement.
“These successful conversion offers represent another significant step toward our goal of reducing our Automotive debt and improving our balance sheet,” said Lewis Booth, Ford executive vice president and chief financial officer.
However, Ford is still listed as below investment grade by Moody’s Investors Service (Ba2) and Standard & Poor’s B+. Both junk ratings from the rating agencies raise borrowing costs and limit large investor funds from buying Ford bonds. Ford lost its investment grade rating in 2005 as successive restructuring plans failed.
Unlike GM and Chrysler, Ford did not need taxpayer funds to see it through the ongoing Great Recession, since it borrowed $23.5 billion before the private markets collapsed due to the reckless practices of Wall Street. The government did offer a line of credit, and gave Ford billions in taxpayer money to retool its truck plants under a different program than the unpopular TARP of the Bush Administration. It’s a difference without a distinction in AutoInformed’s view.
One of the prominent investor concerns this year is that a restructured General Motors, which shed much of its debt and worthless assets because of a forced bankruptcy, now has a better balance sheet than Ford. That concern appears to lessening this afternoon.
“Ford still remains at a disadvantage because of its size compared to GM,” said Joe Phillippi of the Auto Trends consultancy. “While debt is now less of a factor, Ford is still carrying a lot of it. However, this puts them in better shape, and is the next step on the road to a full recovery.”
Ford had previously said that even without the conversion offers, it expected its Automotive cash to be about equal to Automotive debt by the end of this year.
With the conversion offers, we will be clearly net cash positive by year-end 2010,” said Booth today.
This will result in the issuance of another 274 million shares of Ford’s common stock and the payment of $534 million in cash premiums on the expected settlement date of Nov. 30, 2010. The cash premiums reflect in large part the present value of the interest payments that would have been made on the tendered 2036 and 2016 Convertible Notes to the first date (Dec. 20, 2013, and Nov. 20, 2014, respectively) interest was due.
The shares of the watered Ford common stock issued on the settlement date of the conversions have been included in Ford’s calculation of diluted earnings per share since the beginning of the year, the company claims.
In addition to the shares of Ford common stock and cash premiums, Ford will pay accrued and unpaid interest on tendered Convertible Notes for the period from the last interest payment date to (but excluding) the settlement date, which will total $14 million.
Ford common shares closed on the NYSE at $15.95 as investors are becoming more bullish on the stock. The 52 week range is $8.40-$17.42.
