Ford paid down revolver in Q3, announces conversion offer, aims for year-end debt/cash near-parity

By Paul Deckelman

New York, Oct. 26 - Ford Motor Co., cruising to a strongly improved third quarter versus its year-earlier results, was not only busy selling cars during the quarter but also improved its credit metrics, company executives said on their conference call Tuesday following the release of quarterly and nine-month earnings. They said the Dearborn, Mich.-based No. 2 domestic carmaker's net debt had sequentially improved by some $2.8 billion from the previous quarter and that both the overall company and its automotive financing arm, Ford Motor Credit Co., are in a strong liquidity position going forward.

Ford also announced several steps it is taking to further reduce debt, including the prepayment of the remaining $3.6 billion of debt owed to the retiree health-care trust of its voluntary employees' beneficiary association by the end of this month and the launching of conversion offers covering two series of convertible debt totaling nearly $3.5 billion principal amount.

Those initiatives follow the paydown of some $2 billion of revolving credit facility debt during the third quarter ended Sept. 30 as well as the use of $300 million of the proceeds from Ford's approximately $1.5 billion sale of its Volvo unit earlier this year to Chinese automaker Geely to partially prepay its secured term loan.

Total debt, net debt improve

The company's vice president controller, Robert L. Shanks, noted on the conference call that at the end of the third quarter, the automotive parent's debt - which is calculated independently of Ford Credit's obligations - stood at $26.4 billion, down from $33.6 billion at the end of 2009. Payment of the VEBA obligation by month's end will bring the pro-forma total debt figure down to $22.8 billion, which Shanks said represents a $10.8 billion reduction from year-end 2009, generating ongoing interest-expense savings of about $800 million.

With Ford having generated automotive gross cash of $23.8 billion as of the end of the third quarter, it had net debt of $2.6 billion - less than half of the previous quarter's $5.4 billion figure and well down from $8.7 billion of net debt at year-end 2009.

Shanks pointed out that assuming full participation by the noteholders in the conversion offers announced separately Tuesday, covering $579 million of 4.25% senior convertible notes due Dec. 15, 2036 and $2.875 billion of 4.25% senior convertible notes due Nov. 15, 2016, some $2.6 billion of debt would be removed from the company's balance sheet. However, he declared that "even without the benefit of the conversion offers, we now expect our automotive cash to be about equal to our debt by year-end, earlier than we had previously expected."

At the end of the quarter, the company's liquidity stood at a comfortable $29.4 billion, including $5.1 billion of revolver availability and $500 million of other credit lines. That would be reduced to a still-substantial pro-forma $25.9 billion including the cash payment of the VEBA debt.

Ford Credit sees strong liquidity

As for Ford Credit, which breaks out its debt and liquidity statistics separately from the automotive parent company, "liquidity remains strong," proclaimed Neil M. Schloss, Ford's vice president and treasurer, adding that the unit - which provides funding to both Ford and Lincoln-Mercury dealers for the purchase of inventory from the parent company as well as to buyers purchasing vehicles from those dealers - "will continue to maintain cash balances and committed [financing] capacity to ensure liquidity adequately meets our business and funding requirements."

Ford Credit ended the third quarter with cash, cash equivalents and marketable securities totaling around $20 billion, including about $5 billion to support on-balance-sheet securitizations, and projects a year-end balance of between $15 billion and $18 billion. As of the end of the quarter, adding the cash balance to total committed availability under various secured and unsecured funding sources, less any funds that are already being utilized, Ford Credit's liquidity available for use stood at $25 billion - a $4 billion improvement from the second quarter, Schloss said.

Ford Credit's total debt at the end of the third quarter stood at $88.5 billion, down from $103.4 billion a year earlier. After various adjustments, the quarter-end total debt figure was $68.3 billion, down from a year-earlier $79.7 billion.

Ford Credit's managed leverage ratio at the end of the third quarter was 6.3 to 1 - down from 7.7 to 1 a year earlier.

Execs mum on financing plans

During the question-and-answer portion of the conference call, an analyst noted that year-to-date, Ford Credit had done some $6 billion of unsecured public funding (most recently in mid-September, when it priced $1 billion of 5 5/8% notes due 2015 in a quick-to-market deal at 99.466 to yield 5¾%) and wondered that with Treasury rates where they are, would the company be doing more unsecured bond funding. Schloss said that Ford would wait until it releases its end-of-the-year earnings three months from now to lay out its 2011 funding plans, including its mix between secured and unsecured debt.

Another analyst, noting the preponderance of secured debt in the company's capital structure, asked whether Ford would consider including an unsecured revolver at some point. In answer, Schloss agreed with the analyst's observation that "clearly an unsecured revolver would be part of" an investment-grade capital structure, but he gave no further guidance on whether Ford would seek one in its next round of funding.

Ford, unit see Q3 gains

For the third quarter, Ford reported net income of $1.7 billion, or 43 cents per share, a $690 million improvement from the third quarter of 2009. Pre-tax operating profit totaled $2.1 billion, or 48 cents per share, a $1.1 billion improvement from a year earlier.

Ford Credit reported net income of $497 million in the third quarter, an increase of $70 million from $427 million a year earlier. On a pre-tax basis, Ford Credit earned $766 million in the third quarter, up from $677 million a year ago. It distributed $1 billion to its parent in the third quarter and expects to distribute another $1 billion in the fourth quarter for a total of $2.5 billion of distributions in 2010.

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