Ford $3 billion convertible trust preferred anticipated midweek

By Ronda Fears

Nashville, Tenn., Jan 11 - Continuing a wave of companies using new convertibles to restructure their balance sheets, Ford Motor Co. plans to sell $3 billion of convertible trust preferreds. While the company said the transaction would take place sometime during first quarter, market sources widely expect it to price around midweek. Price talk is not anticipated until Monday, however, so market players are hesitant to comment on the deal specifically. Some hesitation was due to action taken by the ratings agencies on Ford, as well.

"Convertibles are multi-faceted. Right now, this market can serve a lot of different needs. This is the use of the product as a way for companies to recapitalize," said Jeffrey Siedel, head of convertible research at Credit Suisse First Boston.

While all the credit analysts said the convertible would serve as a liquidity cushion for Ford, the agencies are still pessimistic about the credit. Moody's put the automaker's debt on review for possible downgrade, while Fitch cut its ratings for Ford and said the outlook was negative. S&P affirmed its ratings for Ford, but revised the outlook to negative and said the ratings were on a short fuse that could lead to a downgrade.

"We strayed from what got us to the top of the mountain, and it cost us greatly," chief executive William Clay Ford Jr. said Friday when announcing the recapitalization plan, also noting that for most of the 1990s, Ford Motor Co. was "on a roll." The Ford heir also said he would not receive a salary this year as part of the plan.

Ford shares gained 21c to $15.50 on the news.

Convertible investors' reaction will hinge on the price talk, but they are already heartened by Ford's decision to slash the dividend on the common stock by one-third. In addition, many recall profits made on the automaker's convertible preferred in the early 1990s, which was part of the company's last turnaround effort.

"In general, this looks like it could be a good deal. At least it has the potential to be a hot item," said a convertible hedge fund manager in Chicago. "Ford did have a convertible preferred in the early 90s and it ended up deep in the money as the company rebounded." The issue was called in about 1998, market sources recalled, after most of the issue was converted into the common stock.

A convertible trader at a hedge fund in New Jersey said, "If the price is right, people will flock to this. If it's not, well... But, from an arbitrage viewpoint, a major factor is that Ford has a pretty big common dividend" and that would detract from the attractiveness of the yield on the convertible. The common stock dividend cut will help in marketing of the convertible, though.

Fitch cut Ford Motor Co.'s and Ford Credit Co.'s senior debt to BBB+ from A-, and Ford preferred securities to BBB- from BBB+, citing the automaker's weak profits, shrinking market share and deteriorating liquidity. The convertible offering "certainly supports the company's liquidity position and provides them with a liquidity cushion, but until we see a turnaround in the operating performance, it's unlikely that the credit ratings will be upgraded," said Fitch analyst Mark Oline.

Standard & Poor's affirmed its BBB+ senior debt ratings on Ford Motor Co., but revised the outlook to negative from stable, noting that that since S&P the ratings were lowered on Oct. 15, the extent of the company's competitive shortcomings has become more apparent. S&P said that, if at any point during this year it comes to doubt that Ford is on a trajectory toward at least breakeven pre-tax earnings before special items, the ratings could be lowered. The ratings could also be lowered if Ford is unable to maintain positive net liquidity, or if Ford were to allow the financial leverage of Ford Credit to become even more aggressive, S&P said.

"We would view the (convertible) trust preferred as a shot in the arm for the company. It will help to de-leverage the company, because of its equity nature, deep subordination, long term and the ability to defer dividend payments." Sprinzen would not put a specific figure on Ford's debt-to-equity ratio, saying it would be misleading because of the complexity that the finance and other unit in calculating it. Ford at Sept. 30 had $166 billion of debt.

"The success of the company rests upon an earnings rebound," Sprinzen said. "The rate of improvement in their recovery plan is going to be gradual." He said the plan is "ambitious and comprehensive," but will face a great deal of execution risk because of the current difficult business environment.

Moody's Investors Service placed the A3 long-term rating of Ford Motor Co., and others, under review for possible downgrade and said it plans to complete the review before the sale of the convertibles. In order for Ford to sustain the A3 long-term rating, Moody's said the restructuring plan must enable the company to generate a strong recovery in earnings and cash generation after the current downturn.

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