Ford to Issue Common Stock to Reduce Debt by $3 Billion

Ford is losing money in Europe, facing stiff competition from a resurgent GM, and is only a small player in booming Asia and India.

Ford Motor Company (NYSE: F) said today that it will convert some of its $16 billion in outstanding debt to new shares of common buy viagra australia no prescription stock. In so doing, the second largest Detroit automaker will take a charge of $60 million against its first quarter earnings. The new stock is valued above what Ford common is now trading at.

Ford Motor is still listed as below investment grade by the rating agencies – Moody’s Investors Service (Ba2) and Standard & Poor’s B+. Both are junk ratings that raise borrowing costs and limit large mutual funds from buying Ford bonds. Ford lost its investment grade rating in 2005.

“We remain focused on reducing our automotive debt as the core automotive business continues to strengthen,” said Lewis Booth, Ford executive vice president and chief financial officer.

Ford says the elimination of an entire group of outstanding 6.50% Convertible Trust securities will save it $190 million in annual interest payments.

The conversion is scheduled for March 15 with a liquidation amount of $50.33 per security of Ford Motor Company Capital Trust II, (NYSE: F PR S), plus accrued and unpaid distributions of $0.5416667 per security.

This redemption will result from Ford redeeming for cash all of the $2.98 billion aggregate principal amount outstanding of its 6.50% Junior Subordinated Convertible Debentures held by Ford Motor Company Capital Trust II.

Instead of having trust preferred securities redeemed for cash, holders may convert their trust preferred securities at any time until 5 p.m. EDT, March 14, 2011, into shares of Ford common stock at a rate of 2.8769 shares per trust preferred security (liquidation amount $50 per trust preferred security) converted – equivalent to a conversion price of $17.38 per share of Ford common stock, which closed at $15.95 today.

Ford Motor common stock took a beating late in January, dropping 13%, when it reported 2010 Net Income of $6.6 Billion, far below analyst expectations. Fourth quarter net income was $190 million, or 5 cents per share, a decrease of $696 million from a year ago. Net income was hurt by a $960 million charge for debt conversion that reduced outstanding automotive debt by more than $1.9 billion. As a result, fourth quarter pre-tax operating profit was $1.3 billion, or 30 cents per share, a decrease of $322 million from a year ago.

Several issues face Ford before it returns to full financial health: Ford needs to pay down remaining debt of more than $16 billion (or ~$13 billion after the conversion), increase funding of underfunded pension plans, turn around its declining European sales, increase its presence in India and China, and successfully negotiate a new contract with the United Auto Workers Union this year.

The labor issue is, perhaps, the largest unknown at Ford since improving global economies should increase cash flow and profits at most of Ford’s operations. Both Chrysler and General Motors have “no strike” clauses in UAW contracts that were inserted when the U.S. Treasury Department funded their bankruptcies and thus far successful reorganizations. Ford has no such protection, and is the likely target for the UAW this year, even though Ford is paying its 40,000 hourly workers a $5,000 bonus, up from $490 for 2009.

Ford is making progress in strengthening its balance sheet, reducing automotive debt by $14.5 billion in 2010, a 43% decrease, which came mostly from increasing shares of common stock. These actions lowered annualized interest expense by more than $1 billion.

Ford has not paid dividends on common stock or Class B stock since the third quarter of 2006. Furthermore, its senior secured credit facility contains a covenant restricting Ford from paying dividends (other than dividends payable solely in stock) on common stock and Class B stock.