Capital Markets

Ford Headed Deep Into Hock

The troubled automaker puts up its factories, its finance company—even its brands—for an infusion of cash.
Stephen TaubNovember 27, 2006

Ford Motor is planning to trot out a large, new borrowing scheme, sending the company heavily into hoc. The struggling auto giant said on Monday that it plans to seek $18 billion in financing to address negative operating-related cash flow, fund its restructuring, and provide added liquidity to protect against a recession or other unanticipated events.

As part of the package, the company plans to raise about $8 billion of a new five-year senior secured revolving credit facility, which would replace its existing unsecured credit facilities of $6.3 billion, and a senior secured term loan of about $7 billion. Ford also plans to raise about $3 billion in unsecured capital market transactions, which may include unsecured convertible notes. The company noted that the size of the individual components of the financing may vary depending on market conditions.

The senior secured revolving and term loan credit facilities will be secured by first-priority liens on principal domestic manufacturing facilities and substantially all of the company’s other domestic automotive assets, intellectual property, real property, all or a portion of the stock of certain subsidiaries—including Ford Motor Credit and Volvo—certain inter-company payables and notes, and up to $4 billion of domestic cash without restriction on its use. The arrangers for the senior secured credit facilities are Citigroup Corporate and Investment Banking, Goldman Sachs Credit Partners, and J.P. Morgan Securities.

Ford said it expects these transactions to close before year-end. Once the transactions are completed, Ford said it expects to have “automotive liquidity of approximately $38 billion” consisting of gross cash and short-term voluntary employee beneficiary association (VEBA) assets and available credit facilities.

Moody’s Investors Service said Monday that Ford’s current liquidity position consists of $23.6 billion in cash and short-term VEBA trust balances, and a $6 billion credit facility. The credit rating agency added that the proposed transactions would increase Ford’s cash position to over $30 million and add about $1 billion to its committed credit lines.

Ford needs to raise cash to pay for its sweeping job cuts and factory closings, according to a report from Bloomberg. Ford has lost money in eight of the past nine quarters and has already lost $6.99 billion in the first three quarters of 2006. Ford spokeswoman Becky Sanch confirmed with the wire service that this is the first time the automaker has used collateral for loans. General Motors recently has taken on secured loans to finance its automotive operations, added Bloomberg.

Investors viewed the announcement negatively, sending Ford’s stock down nearly 3 percent in morning trading on Monday. Also, Moody’s lowered Ford’s unsecured rating to Caa1 on Monday, citing the reduction in asset protection afforded to this class of creditors. However, it affirmed the B3 corporate family rating, which Moody’s explained “recognizes that this funding initiative will support Ford’s fundamental credit profile by enhancing its liquidity.” The outlook, however, remains negative, the credit rater added.

“Completing this financing would considerably strengthen Ford’s ability to fund the large cash requirements it will face through 2008,” said Bruce Clark, a senior vice president with Moody’s, in a statement. “However, the relatively robust security package being afforded to the term loan and the revolving credit facility hurts the position of unsecured creditors.”

In a note to investors Monday morning, high-yield equity analysts from Bear Stearns said Ford’s news should be treated more as a positive than a negative. “The fundamental benefit of improved liquidity yields a net positive for the credit in our view,” they wrote. “As we have seen with several other companies in the automotive sectors, the market’s opinion (which we agree with) is that strong liquidity outweighs structural subordination.”