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Ford Reduces Debt by More Than $1.9 Billion in Convertible Bond Exchange

November 25, 2010
3 min to read


Ford Motor Co., seeking to regain an investment-grade credit rating, reduced its debt by more than $1.9 billion by paying investors in its convertible debt to swap their notes for shares.


Investors converted $554 million of 4.25 percent senior convertible notes due Dec. 15, 2036, and $1.99 billion of 4.25 percent senior convertible notes due Nov. 15, 2016, the company said today in a statement. The conversions lowered the debt in Ford’s automotive operations to $20.9 billion on a pro-forma basis, compared with about $19.8 billion in gross cash, reported Bloomberg.

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Ford has reduced its automotive operations’ debt by $12.8 billion this year, lowering annual interest costs by almost $1 billion. The company said today it will have more cash than debt by the end of the year as its auto operations remain profitable and its credit unit pays it a $1 billion dividend.


“Ford has sworn off debt,” said Joe Phillippi, principal of consulting firm AutoTrends Inc. in Short Hills, New Jersey. “They are building an armor-plated balance sheet for the inevitable next downturn, and they will benefit mightily as the market recovers and grows.”


Moody’s Investors Service rates Ford Ba2, the second level below investment grade, and Standard & Poor’s rates it B+, two steps lower. Ford lost its investment-grade ratings in 2005 as rising gasoline prices and falling truck sales led to $30 billion in losses from 2006 through 2008.


Ford rose 25 cents, or 1.6 percent, to $15.95 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 60 percent this year.


Bond Price

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Ford’s $1.8 billion of 7.45 percent notes due in July 2031 rose 0.375 cent to 108.625 cents on the dollar at 10 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.


Ford could return to an investment-grade credit rating in the first half of 2011, Phillippi said. Ford’s earnings power will be enhanced by cutting interest payments by almost $1 billion, he said.


“These successful conversion offers represent another significant step toward our goal of reducing our automotive debt and improving our balance sheet,” Chief Financial Officer Lewis Booth said in the statement.


The company said it would take a charge of about $960 million in the fourth quarter to account for the conversion offers.


Conversion Terms

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Ford gave holders of the 2036 notes 108.6957 shares of common stock and a cash payment equal to $190 for every $1,000 in principal amount, along with accrued and unpaid interest. Ford gave holders of the 2016 notes 107.5269 shares and a cash payment equal to $215 for every $1,000 in principal amount, along with accrued and unpaid interest.


The conversions will save $180 million in annual interest expenses, Ford said. The shares issued in the offer had already been included in the Dearborn, Michigan-based automaker’s calculations of earnings per share since the beginning of 2010.


Ford, the only major U.S. automaker to avoid bankruptcy last year, earned $6.37 billion in the first nine months of the year, the most since 1998. New models such as the Fiesta subcompact and redesigned Taurus sedan have helped Ford’s U.S. sales rise 21 percent this year, almost twice the market’s gain of 11 percent.


Ford’s debt is no longer a competitive disadvantage versus General Motors Co. and Chrysler Group LLC, which had obligations extinguished in bankruptcy last year, Phillippi said.


“Ford’s debt doesn’t prevent them from doing anything,” Phillippi said. “This is going to make people feel even more positive about the Ford story.”

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