Erin Rohde, manager of foreign exchange and hedging, monitors marketing investment. Part of Ford's success is that the automaker manages its own money and has its own trading floor inside its World Headquarters. (Clarence Tabb Jr. The Detroit News)
Dearborn --Ford Motor Co. may be picking up market share from its bankrupt rivals, yet some analysts worry it could be disadvantaged as General Motors Corp. and Chrysler LLC erase billions in debt through Chapter 11 restructuring.
But Ford is working a plan to chisel away its own mountain of debt through carefully timed stock sales and debt swaps. Using these tools, it has during the past two months erased more than $10 billion of the nearly $36 billion of debt it started the year with -- demonstrating a financial savvy not seen from a Detroit automaker in at least a generation.
Chief Financial Officer Lewis Booth told The Detroit News that he and his team will continue to work the markets in the months and years ahead, and he is confident that the benefits of avoiding bankruptcy will more than offset any short-term disadvantage Ford's balance sheet has versus GM and Chrysler's.
"Bankruptcy does restructure your balance sheet. That's one of the reasons you do it," he said. "But if GM and Chrysler have some things going for them, they have other things going against them. Bankruptcy is a pretty drastic process."
Mark Oline, managing director of Fitch Ratings, said GM still will have a significant amount of debt on its books and years of restructuring ahead when it emerges from bankruptcy. Ford will have better access to capital markets when the economy recovers and is already going a long way to address its debt load even under today's adverse conditions.
"They've tapped the market opportunistically," Oline said, pointing to a recent deal where Ford issued 345 million in new shares just as its stock hit levels not seen this year. "Ford is better positioned to return to positive cash flow quicker."
Funding the turnaround
Before Alan Mulally agreed to lead Ford's restructuring in the summer of 2006, he asked Bill Ford Jr. to assure him that Ford would have ample cash to fund what morphed into a global turnaround.
A massive borrowing already was in the works. CFO Don Leclair was assembling what would become one of the largest corporate finance deals in the history of the automobile industry.
Leclair had grown increasingly concerned about the company's finances, according to people familiar with the situation. Ford's credit rating was falling fast as market demand shifted away from the big trucks and sport utility vehicles that had been its bread and butter for years. At the same time, Leclair had become convinced that sales projections for the new models Ford was rolling out to replace them were too rosy.
Worried that banks would soon slam the door in Ford's face, Leclair began preparing for one last big push to secure as much credit as possible.
Mulally began working with Leclair on this even before he arrived from Boeing Co., where he led the commercial aviation unit, to become Ford CEO in September of that year. He pushed Ford's finance team to aim even higher, authorizing the use of all of Ford's North American assets as collateral to secure $23.6 billion in new funding.
Without it, ranking Ford executives concede the automaker would be joining its cross-town rivals in bankruptcy court. At the time, however, Mulally and his team were criticized for what many saw as a risky, bet-the-company move.
GM and Chrysler were not so fortunate. When GM explored a similar deal a few months later, it found that the capital markets had lost their appetite for the auto business. By the end of last year, both had run out of cash and were forced to turn to the American taxpayers for loans to survive.
Now, GM and Chrysler have filed for bankruptcy -- a move that will allow them to erase much, but not all, of their debt.
As GM and Chrysler prepared their bankruptcy filings, Ford's treasury department was watching the markets.
Improving the balance sheet
Ford's latest stock deal was inspired by similar moves at Alcoa Inc. and United States Steel Corp. that succeeded in raising additional capital for those companies without doing too much damage to the share price, Ford Treasurer Neil Schloss said in an interview.
Issuing millions of new shares dilutes investors, but using proceeds to pay down debt improves the company's balance sheet, which should boost share prices. By timing the deal to coincide with a sharp upturn in the company's share price, the near-term damage is minimized.
"We really don't want to flood the market with equity that investors don't want," he said. "We've always tried to make sure that the securities we issue are in demand."
Ford's share price has rebounded and it has increased its market capitalization by $2 billion at a time when GM's shares were delisted from the New York Stock Exchange.
Oline expects Ford to make similar moves going forward.
"Right now, the interests of the debt holders and equity holders are very much aligned. We should expect that Ford will continue to dilute existing shareholders periodically in order to boost liquidity," he said. "That's been something that's been happening across a lot of industries right now. Typically, there has been concern that issuing additional equity dilutes existing holders, but in a lot of cases it has actually served to boost the stock price because it does show access to capital and it does serve to boost liquidity."
Like many on Wall Street, Oline is impressed by Ford's market strategy. Ford's shares have more than tripled since early March, closing Thursday at $6.36.
"We do a lot of work to understand what's on investors' minds, what they're interest is, what they're looking for. So, when it's time to do something, we have a pretty good insight into what will work in the capital markets," Schloss said. "We also manage all of our own cash."
While many corporations rely on big investment banks to manage their money, Ford trades its own account. The eighth floor of its world headquarters has an in-house trading floor that looks a lot like those in New York. Ford's traders handle everything from derivatives to currency hedges.
"When we see an opportunity, we can be pretty nimble about taking advantage of it," said Booth, who has impressed subordinates by granting them more decision-making power since taking over as CFO in November. "The culture at Ford is more open now."
Schloss said debt remains a necessary part of Ford's strategy. Ford Credit needs continued access to both the secured and unsecured debt markets to balance its funding line, he said.
"On the auto side, we're not going to stop where we're at," Schloss said. "We're going to continue to find ways to improve the balance sheet."
Ford has some major debt hurdles on the horizon. Ford Credit has a $5 billion payment due in October. The parent company has a $10 billion payment due in 2011. But many analysts expect Ford will find a creative way to restructure these payments before they are due.
"You can see from our actions that we are taking restructuring our balance sheet very seriously, but the single most important way is to improve our base business," Booth said. "We don't want to just survive this period. We want to invest in our future, so that as things turn around, we can be up and at 'em. "