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Fate of jobs bank up in air at Ford

Saturday, February 7, 2009

Fate of jobs bank up in air at Ford

UAW ties end of that program, other givebacks to concessions from bondholders.

Bryce G. Hoffman / The Detroit News

Ford Motor Co. reassured Wall Street last week by announcing it had reached a deal with the United Auto Workers union to eliminate the jobs bank program.

But that deal is contingent on Ford winning concessions from its bondholders similar to those being negotiated by General Motors Corp. and Chrysler LLC as a requirement of the federal loans they received, The Detroit News has learned. That is why Ford was unable to provide a date for shutting down the controversial program, which pays wages and benefits to idled factory workers.

Other important concessions on issues like supplemental pay for laid-off workers and changes in work rules are also likely contingent on Ford’s ability to negotiate with its major bondholders.

The UAW allowed Ford to announce an agreement in principle to match those it has already reached with the two other Detroit automakers, according to a source. However, the union will only agree to a date once it has evidence of "shared sacrifice" on the part of Ford’s bondholders.

The UAW also wants a seat on Ford’s board of directors in exchange for allowing it to cover a big portion of its retiree health care obligations with company stock instead of cash, according to people familiar with the situation.

It will be difficult for Ford to give UAW President Ron Gettelfinger the bondholder concessions he needs to sell his membership on the jobs bank deal. It’s a formidable challenge because the carmaker can offer bondholders few reasons to renegotiate its debt.

GM and Chrysler already have eliminated their job banks, which has allowed them to get rid of the workers in those programs, and convince active workers to consider a new round of buyouts. Elimination of the jobs bank was a condition of the federal loans they received. The two automakers also are required to restructure two-thirds of their debt.

Negotiations to do that have already begun. If GM and Chrysler bondholders fail to negotiate better terms, the companies will violate the provisions of the loan agreements and be forced into bankruptcy.

"Ford has a whole lot less leverage to force something," said Shelly Lombard, an analyst with Gimme Credit. "I’m not sure what they hold over bondholders’ heads."

But people close to the situation said Ford does not need to match GM’s or Chrysler’s debt restructuring to satisfy the union. Ford only needs to give Gettelfinger enough to show his members that its bondholders are giving up something, too.

"It’s not insurmountable," one source said. "But we’re going to have to get creative."

Ford could do a debt-for-equity swap similar to the ones it negotiated with Ford Credit bondholders in August and October. Under the terms of those deals, the automaker issued a total of $1 billion in new stock and used the proceeds to retire short-term debt. Bondholders got a small premium — about 10 points more than the trading value at the time — but not the full value of their paper.

That allowed the company to reduce its debt, but also diluted Ford’s stock — further undermining share prices.

Another option is a debt-for-debt deal. Ford could trade new unsecured bonds to buy out existing short-term bondholders. Investors would receive a higher interest rate and a premium over their bonds’ current value, but not the full value. That would allow Ford to push off the repayment date, taking pressure off the company.

One Wall Street source said those are viable options for Ford, particularly if it can put together a "club deal" involving just four or five of the largest bondholders.

"If you’re thinking about doing more than a one-off exchange, then you’re going to have groups of bondholders hiring lawyers to represent them and they’re all going to be demanding equity," that person said, adding that major investors could be more easily convinced that one of these deals is in their best interest. "I’m making you a more viable entity. I’ll more than make up for it on the long end. You want to push this down the road to a better time. You want to give the company some leeway."

Whatever form the deal takes, it is likely to involve Ford Credit’s paper, rather than the parent company’s. That is because Ford does not have any short-term securities. But restructuring the debt of its lending arm could allow Ford Credit to resume dividend payments to Ford and allow the company to consolidate its balance sheet.

Ford ended 2008 with $25.8 billion in debt. Bonds accounted for about $17 billion of that.

Ford CEO Alan Mulally demurred when asked about negotiations with bondholders last week.

"We continue to work with all of our stakeholders to improve our competitiveness," he told The News.

The UAW did not respond to requests for comment.

Lombard still thinks any deal will be a tough sell for Ford.

If the U.S. automobile market rebounds, Ford’s bonds could quickly gain more than the company is prepared to give to restructure its debt. If it continues to decline, Ford may well find itself in Washington with its hand out, too. In that case, she said, the government will mandate debt restructuring as it has with GM and Chrysler.

"If I was a bondholder, I’d wait it out," she said. "There’s almost an incentive not do anything now."

But saving Ford from that fate, which would subject the company to federal oversight and give taxpayers a big chunk of its equity, may be incentive enough for those who are in it for the long haul to give Ford what it needs.

"Everything is trickier for us because we’re not doing this under the auspices of the federal government," the Ford source said. "But we still wouldn’t rather be GM."

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