Big 3’s heaviest debt load now falls on Ford
July 13, 2009 |10:10 |
Ford Motor Co. has benefited for months from the woes of its bailed-out Detroit brother General Motors Corp., but GM’s emergence from bankruptcy – freed from its heaviest debts – now puts debt-laden Ford at a disadvantage.
GM used the bankruptcy process and its federal bailout to shed more than $40 billion of past debts and other obligations, and now can operate more nimbly and profitably in the most competitive auto sales market in a generation.
But Ford still faces the steep cost of servicing its $32 billion of debt – nearly twice as much as GM’s and three times as much as Chrysler Group LLC’s – since GM and Chrysler emerged from bankruptcy. Moreover, Ford was not able to use bankruptcy to shed other burdens, such as a bloated dealer network and idle manufacturing plants, as its rivals did.
The companies now must compete in a market that has shrunk by more than a third from sales levels that prevailed a year ago. But GM estimates that it can now make a profit with annual U.S. auto sales of about 10 million, down from 16 million in 2007, while Ford would need to have higher sales on average to foot its higher debt costs and make a profit.
"Ford got bupkis for its financial virtue" by going deeply into debt to avoid a government bailout, said Antony Currie, an analyst at Breakingviews.com. Ford’s strategy helped it for a while to gain market share over its rivals, attracting buyers who are repelled by the government’s involvement with the other Detroit automakers.
But in the post-bankruptcy world, Ford now is saddled with obligations GM and Chrysler no longer have to bear, he said.
"By cleaning up its two U.S. rivals, Uncle Sam has put Ford at a competitive disadvantage," Mr. Currie said, adding that the government also is "conflicted" because it owns GM and is essentially in competition with Ford.
Aware of the appearance that it is handing GM a major advantage, the Obama administration has sought to lend Ford a hand by awarding it a $5.9 billion loan last month to develop more fuel-efficient cars and by providing financial assistance to auto suppliers who service all the Detroit automakers.
Ironically, the government loan only added to Ford’s burdensome debt levels, while the government’s assistance to GM was intended to avoid increasing the larger automaker’s debts.
Ford officials say they’re aware of the advantages rivals have gained from their trip through bankruptcy, but they remain confident that Ford is well-placed to keep picking up market share as the company attracts customers who do not want the government dictating their choice of cars.
"We don’t know what the implications are going to be, but one thing’s for sure: I like our position," Ford Chairman Bill Ford said at a Detroit conference last month.
If auto sales don’t improve soon, some analysts say, Ford’s debts may eventually drive it into bankruptcy, where it would could seek to jettison overhanging costs like the other auto companies did.
"GM and Chrysler are showing how you can do things in bankruptcy you can’t get close to outside of bankruptcy," said David Cole, chairman of the Center for Automotive Research in Michigan. "It’s a huge issue."
But Gregg Lemos-Stein, an analyst with Standard & Poor’s Corp., said he has little worry that Ford will have trouble paying its debts. S&P has given Ford a CCC-plus credit rating that indicates its bonds are deep into the junk category.
"Leverage is a concern, but it’s not the primary concern. The greater concerns are low sales and underused capacity," he said. While Ford has had more cash on hand than its rivals, "they don’t have an indefinite supply of cash" and the outflows are likely to continue as long as sales remain depressed, he said.
Ford also could face difficulty if it seeks to add to or refinance its debts, or replace them with equity through debt exchanges. Analysts say investors will be wary of purchasing Ford debt and stock now that GM has demonstrated that bankruptcy is a viable option should the company start to founder.
GM repudiated its $27 billion of unsecured bonds in bankruptcy, which were rated as junk, much like Ford’s. And its stockholders were entirely wiped out.
Ford’s debt holders may wonder whether they would face a similar fate, said Glenn Reynolds, an analyst with CreditSights, citing "lingering bad will and capital markets bitterness" in the wake of the GM bankruptcy.
"How long will memories last?" he asked.