Gimme Credit unmoved by Ford turnaround plan

By Ronda Fears

Nashville, Tenn., Jan. 16 - Gimme Credit, an independent research service for institutional investors in corporate bonds, was far from impressed with Ford Motor Co.'s restructuring plan from a fixed income investor's viewpoint. In fact, the group professed "never have so many said so much about so little of vital interest to bond investors" in a recent report.

"We appreciate the constraints under which Ford management must operate when attempting to cut costs and reduce overcapacity. But surely they could come up with something a bit more innovative than 'back to basics,'" said Carol Levenson, director of research at Gimme Credit.

"While we're glad Ford has a plan, it hasn't improved our view of its credit quality.

The analyst noted in the report that Ford's plan to boost profitability includes only a relatively modest amount ($1.5 billion) from the most obvious, but also most inelastic, source of meaningful cost-cutting opportunities - capacity reduction. The $1.5 billion reduction in overhead is one area where Ford can be expected to deliver promised results fairly easily, however, the report said. There's another $3 billion in other efforts, which Levenson understands to mean profit benefits from a richer product mix, higher market share and other tough goals. An additional $3 billion is expected from material cost reductions.

"If we were handicapping these profit improvement targets, we'd haircut them by at least one third," Levenson said.

"These plans are carefully structured to fall within the limits of Ford 's current UAW contract, which expires in September of next year. Somehow, we doubt the next contract will be any more flexible.

Even assuming Ford makes it to breakeven this year, the Gimme Credit analyst projects its cash position will continue to deteriorate, as automotive debt is almost certain to exceed cash. The planned $1 billion in asset sales and a further cut in the common stock dividend will help preserve cash, as will any additional improvement in working capital, but capital spending will remain high in order to achieve Ford's other goals relating to new product introductions and improved manufacturing efficiency. Levenson estimates capital spending and dividends in 2002 will consume all the automotive division's cash flow and then some.

"The capital-strengthening plan to issue $3 billion in convertible trust preferred securities is better than additional straight borrowing, but less beneficial than issuing straight equity," Levenson said in the report. "We would have appreciated much more attention paid to the crucial issues of cash, cash flow, and debt levels in the context of the revitalization plan."

The $9 billion in targeted profit improvement represents 7% of Ford's automotive expenses over the last year, the analyst pointed out, while cost savings from capacity reduction amount to a mere 1% from an announced 16% capacity reduction in units. On the bright side, she noted that despite an after tax charge of $4.1 billion, Ford claims cash restructuring expenses will be only $100 million.

"Unfortunately, it appears bond investors will have to wait until the company announces its fourth-quarter earnings to get a better handle on such vital topics as marketing costs, debt, cash and credit issues at Ford Credit," Levenson said. "Meanwhile we remain unenthusiastic about this credit."

Ford has a conference call scheduled with stock analysts at 9 a.m. ET and with fixed income analysts at 10 a.m. ET to discuss fourth-quarter results.

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