Ford to reduce $16 billion in debt
March 5, 2009 by Alborz Fallah
Ford Motor Company is planning to reduce its debt by more than $16 billion (US$10.4 billion) in the near future. The plan will see the swapping of company stock and cash for existing debt.
The blue oval’s debt-reduction plans are in line with the US government’s contractual agreement with General Motors and Chrysler to hand out the already approved $27 billion (US$17.4 billion) in loans.
However unlike GM and Chrysler, Ford has so far not asked for loans from the US government. Ford has suggested that it can benefit from a $13.9 billion (US$9 billion) line of credit just in case US car sales continue in the same downward manner as they have in January and February.
“Ford is an enormously leveraged company today, so a debt reduction of this size would significantly improve the company’s risk profile and reduce its losses by slashing interest expense,” said John Casesa, principal of Casesa Shapiro Group LLC and a former Wall Street analyst.
At the end of last year, Ford had almost $40 billion in debt, so a $16 billion reduction is a significant step in the right direction.
Even though the company has failed to post a profit since 2005, it will make up to $3.4 billion (US$2.2 billion) cash available for the debt restructuring.
If you’re thinking Ford has done rather well given the other big two Americans are in serious financial trouble, it’s worth noting that in late 2006 Ford borrowed $36 billion dollars (US$23.4 billion) – this cash reserve is part of the reason the company currently needs no further aid.
It’s not all good news for Ford, however, the American giant posted a massive 49.5 per cent drop in US sales for February – marking the company’s 25th sales decline in the past 26 months.
Meanwhile the overall U.S. new car sales market has dropped by 41.3 per cent for the month, being down 39.4 per cent year to date.
Print it: 
So its a garage sale?
Ford had the forsight to do something before the shit hit the fan.
Toyota’s wholly-owned financial subsidiary is asking for about Y200 billion ($A3.17 billion), according to Japanese media. The carmaker has said it is seeking aid but declined to confirm the amount.
See? even Toyota the wolds largest carmaker is seeking financial help, not just the financial arm but Toyota itself……
I am glad i dont make cars for a living …….they all have their hands out for money now !!!!!
I’m guessing you mean yearly profits, because they have generated quite a few quarterly profits over the last few years. Secondly, Ford’s car sales actually improved 5% from January, comparing last years record month with this year makes little sense, because the seasonal changes in sales (which is what YoY changes represents) are tiny compared to the effect on sales this financial crisis is causing. Thirdly, Fords market share had increased four months in a row from Oct – Jan 09, and has only stalled this month because of two things. One, Ford has reduced its sales incentives down $800 per vehicle in a month where the average incentive price per vehicle in the industry went up $400, to $3000 per vehicle. Two, Chrysler is currently averaging $5500 per vehicle. Thats why Chrysler sales drop YoY dropped less than GM or Ford, its sacrificing profit for volume, and stopping Fords market share increase. Fourthly, just to be picky, its sales figures are actually down 48.4% in the US, not 49.5%.
Numbers never lie, but what numbers you use can spin a positive or negative story. So yes, Ford sales compared to Feb 08 are down, a lot. On the plus side, they are up from January, and they are making more profit per car. Their debt is also tiny compared to GM, and getting smaller, not bigger. Yes, removing the $16 billion in debt will dilute share price, but less debt, less interest paid, and given automanufacturers current credit rating, debt is very expensive.
Lastly, to the people who were blasting Ford for selling Jaguar and Landrover, I hope your busy munching on humble pie. Ford sold these brands because they saw this storm coming. Yes, overall they lost money and some good talent, but Ford got rid of those money losing subdivisions whilst the world economy was still healthy enough for people to buy them. Compared to GM who can’t sell Opel, Saab, Saturn or Hummer, and are left with brands bleeding money out of every orifice and no ability to sell them, its a much better situation. Buying something for 10 billion and selling it for 2 billion is a lot cheaper than buying something for 10 billion, lossing billions each year and then selling them for nothing.
I agree that ford foresight coming into this “crisis” has been pretty good.
This is yet another stroke of great planning to add to the many great moves Mullally has already made
TS,
no not really a garage sale, but rather using their cash reserve and selling shares to ease debt.
Although any move that will see them weather the storm on their own is a good move.
The only weird thing about it is with the interest rate at 0% in the states, surely ford isnt paying too much on their owing debt anyway.
Anyone got an idea of what clearing this 16bill in debt will save???
Andrew, their credit rating affects both the interest rate they get, and the cost of insurance on that debt. In July last year Fords debt protection insurance costs hit 29.5%, which means it cost Ford $295m a year to insure against $1 billion in debt. Obviously the more likely you are to go bankrupt, the more the insurance to protect your debt goes up. However I can’t tell you how much of Ford’s debt was insured, but still, getting rid of as much as possible is always good.
TS, not garage sale,actually good money management. Even the little people (ie the mums & dads) are looking at reducing debt exposure at present.