Ford Debt Repurchase Positive but Liquidity Remains a Concern

CHICAGO — Ford’s reduction of $9.9 billion in debt through the repurchase of debt and the issuance of new equity is a positive step in managing the company’s liability structure, but does not currently impact the company’s rating or outlook, according to Fitch Ratings. The reduction in unsecured debt decreases the company’s interest costs at the price of a moderate amount of liquidity ($2.4 billion). Liquidity, however, remains a clear concern over the next 18 months. The repurchase also cements losses incurred by investors on the unsecured debt that has been tendered.

The results of the repurchase will allow Ford to realize the benefits under a new United Auto Workers (UAW) cost-saving agreement, including the option to fund up to 50% of the company’s VEBA obligation with equity. (The terms of the UAW agreement incorporated the requirement that Ford accomplish a stated reduction in unsecured debt ‘over time’.) The interests of Ford’s debt and equity holders are aligned in the current environment, facilitating Ford’s continued willingness to use equity to fund or reduce liabilities. Ford’s ability to maintain its current market capitalization could result in further similar actions. In contrast to GM, Ford’s debt repurchase represents actual debt reduction, whereas the GM reduction in unsecured debt, if achieved, will achieve little debt reduction due to the incremental government loans that could be put in place.

The shrinking of Ford Credit’s balance sheet and efforts on behalf of the federal government to improve the availability of retail financing through the Term Asset-Backed Securities Loan Facility (TALF) program have benefited Ford’s ability to utilize available capital and liquidity at Ford Credit to effect the debt repurchase program. However, lease and floorplan financing will remain a challenge.

Ford will remain under severe operating stress through at least 2009 due to continued growth in unemployment, weak consumer confidence and the impact of the credit crisis on consumers and the capital markets. Liquidity appears adequate through 2009, potentially assisted by moderate asset sales. Cost reductions and improvement in industry sales levels in 2010 will be necessary to avoid having liquidity reaching minimum required operating levels. Negative cash flow will persist due to operating losses, restructuring costs and working capital requirements, although at more moderate levels than in 2008. The results of the federal government’s decision on providing aid to GM and Chrysler could also impact the ability of suppliers to remain in production and solvent. Fitch currently recognizes Ford’s ability to steer a course independent of government aid as a positive factor.