Ford mortgages nearly all U.S. assets to borrow $18 billion

Ford Pledges Major Assets in Financing

By Nick Bunkley
The New York Times
Tuesday, November 28, 2006

http://www.nytimes.com/2006/11/28/business/28ford.html?_r=1&ref=business...

DEARBORN, Mich., Nov. 27 -- Executives at Ford Motor Co. have insisted they are willing to bet the company's future on a turnaround plan put in place earlier this year.

On Monday they essentially did just that, mortgaging nearly all of Ford's domestic assets -- its plants, office buildings, patents, and trademarks -- along with stakes in Ford Credit and Volvo, to raise $18 billion.

Ford will use the money, which includes cash and an expanded line of credit, to cover several years of restructuring costs. Under a plan called the Way Forward, Ford expects to eliminate more than 40,000 jobs and close more than a dozen plants.

While other auto companies -- including General Motors, earlier this year -- have put up manufacturing equipment and other types of collateral over the years to secure loans, Ford has never done so in its 103-year history.

For decades, its credit was so good that it could easily borrow without pledging assets. But it is now taking out the corporate equivalent of a home equity loan and in doing so, signals that it expects even more stormy times before its restructuring is complete.

Analysts said the step, which Ford executives signaled early this fall, could put the company's independence at risk. If management fails to make the ailing company profitable, Ford may be left with little choice but to find a buyer or merger partner or file for bankruptcy protection.

"It's a historic moment for the company," said Sean Egan of the Egan-Jones Ratings Company in Wynnewood, Pa. "It underscores the gap between the domestic manufacturers and Toyota, who's sitting with over $80 billion of cash on its balance sheet and a stellar credit rating."

Yet, the structure of the debt, which it arranged with J.P. Morgan Chase, Citigroup, and the Goldman Sachs Group, signaled that Ford is not planning to sell a stake in Ford Credit, as had been speculated earlier this year, and that it planned to keep Volvo, among the most successful of its foreign brands.

Others brands, however, are up for sale, including Aston Martin, the maker of high-powered British sports cars. Ford is also expected to seek deals to sell Jaguar and Land Rover.

The amount Ford is borrowing exceeds the total market value of all its outstanding stock by $2.6 billion. The company said it expected to complete the financing by the end of the year, giving it a total of $38 billion in liquidity to work with.

Ford, in a statement, said it needed the loans "to address near- and medium-term negative operating-related cash flow, to fund its restructuring, and to provide added liquidity to protect against a recession or other unanticipated events."

Company shares fell 36 cents, or 4.2 percent, to close at $8.16.

"This refinancing tells us that they see very tough times ahead," said John Casesa, an automotive analyst with Casesa Strategic Advisers in New York. "Either they're incredibly conservative or they're preparing for an extremely dark outlook."

Although Ford said the loans would help it weather a recession, analysts say the company should be more concerned with fending off competitors than surviving a drop-off in sales.

Some forecasts, citing a slump in the housing market and lower consumer confidence levels, call for 2007 sales to fall by as many as 400,000 vehicles from this year, when automakers are expected to sell roughly 16.6 million vehicles in the United States.

Others are not so pessimistic. While 2007 may begin slowly, G.M. contends demand for new vehicles will pick up.

"Our forecast says it should be very similar to this year, and we're hoping it will be stronger," G.M.'s president for North America, Troy Clarke, said last week. "It kind of feels a little soft right now."

Ron Pinelli, president of the Autodata Corporation, an industry statistics firm in Woodcliff Lake, N.J., said he expected sales to stay fairly steady through 2007, although he acknowledged that they were more likely to decline than to rise.

"I don't think it's doom and gloom for auto sales, but it might be a little bit tougher," Mr. Pinelli said.

Two major ratings agencies, Standard & Poor’s and Moody’s, lowered their ratings of Ford's unsecured debt on Monday, saying the asset pledges would make it more difficult for unsecured lenders to get their money back if the company defaults. Still, Moody's analysts saw logic in the plan from the company’s perspective.

"It was important for Ford to structure this type of financing plan in order to ensure that it had adequate liquidity as it enters a highly challenging period," Moody's automotive analyst, Bruce Clark, said. "The company still faces daunting competitive and market challenges, but this plan would give it some breathing room over the next two years."

An industrywide downturn would increase the pressure on Ford, which is in the midst of its third turnaround in five years. Monday was the deadline for hourly workers in Ford's American operations to decide whether to accept retirement and buyout packages worth as much as $140,000 each.

Ford offered the deals to all 75,000 of its union workers but has not predicted how many would accept.

Nearly 35,000 workers at G.M., which had about 113,000 at the beginning of the year, accepted similar deals, costing that company about $3.8 billion. Ford's program is expected to cost somewhat less than that amount because its work force is smaller and, on average, younger and thus farther from retirement age.

Ford, which lost about $7 billion in the first nine months, now says it does not expect to earn a profit in North America until 2009 at the earliest.

The company said last month that it might arrange secured financing for its turnaround because its credit rating, now well below investment grade, makes other methods for borrowing money too expensive and too limiting.

Of the $18 billion Ford is borrowing, $15 billion will be secured and $3 billion unsecured.

Ford's chief financial officer, Don R. Leclair, recently called management's willingness to leverage the company's assets "a measure of the confidence we have" in the turnaround plan.

Shelly Lombard, senior high-yield analyst with Gimme Credit, a corporate-bond research service in New York, said the financing plan showed that Ford's "problems are more serious and may take longer to fix than it initially anticipated."

"It's a better alternative," she said, "than running out of cash and filing bankruptcy."

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