Ford soars on debt restructuring
Posted
Apr 06 2009, 02:01 PM
by
Anthony Mirhaydari
Rating:
Ford (F) announced that it has done what General Motors (GM) and Chrysler have failed to do: Lighten its debt burden.
Using $2.4 billion in cash and 468 million shares of stock, Ford will cut its $26 billion debt load by nearly $10 billion -- saving more than $500 million in interest expense each year. This brings Ford's total debt reduction efforts to more than two-thirds of its unsecured debt. Because of these efforts, Ford's shares were up almost 16% during trading on Monday.
The largest concern for Ford has been its dwindling cash reserve. Currently, the company's cash burn rate is nearly $4 billion per quarter -- a majority of which is being spent on the working capital needed to keep factories operating. That means Ford, based on the work of Barclays Capital analyst Brian Johnson, now has about $19 billion left in the bank. Will this be enough to survive until sales return to more normal levels?
The short answer is probably. Sales were up on a month-to-month basis in March as efforts to unfreeze the auto credit market started to bear fruit: Ford Motor Credit submitted $2.95 billion in securitized auto loans to the Federal Reserve's new Term Asset-backed Securities Loan Facility, or TALF. This will help buyers of Ford products receive more attractive financing terms. The Obama administration's recent commitment to back the warranties of GM and Chrysler vehicles will add another positive boost to industry sales. Also, Ford and GM are both offering payment protection to buyers threatened by job loss.
Assuming domestic auto sales continue to rise from unsustainably low levels, and Ford continues to steal market share from its embattled Detroit rivals, I see Ford ending the year with around $12 billion. After a $2 billion debt repayment due in January, Ford will be very near the $10 billion minimum that it needs to fund day-to-day operations. This means some form of government support is still well within the realm of possibility.
But even if it needs to ask for bridge loan assistance, Ford is now much further along in its restructuring efforts, continues to benefit from negotiations to reduce labor costs, has a solid management team, and benefits from a very desirable pipeline of new products. Check out the new Fusion hybrid, Fiesta and Taurus SHO. These are exactly the type of products Americans want to drive, especially with fuel prices on the rise again as the threat of inflation and newfound optimism about the economy drive crude oil higher. Once the recovery begins, Ford will be the best positioned of all America's automakers to fight off foreign competitors and prove that Detroit can be competitive outside of its truck products.
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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