By Ronda Fears
Nashville, Tenn., Oct. 14 - Following Monday's equity downgrade of Ford Motor Co. by Merrill Lynch & Co. analysts, the convertible research group removed the Ford Motor Capital Trust II 6.5% preferred convertible due 2032 from their model portfolio.
Citing the continuing deterioration in new and used car prices and the risk of further margin compression to auto manufacturers, Merrill auto analyst John A. Casesa lowered his investment opinion on Ford from buy to neutral.
"Since May the company has apparently gained traction with its restructuring and most recently got an agreement with the CAW [Canadian Auto Workers union] to close its Ontario Truck Plant," Casesa said in a report Monday.
"Nonetheless, auto fundamentals are at the root of the earnings squeeze and the industry's intensifying price war means that Ford will have a tougher time than we anticipated retaining its cost-savings as profit improvement, and it will take longer to realize this profit improvement.
"Ultimately, we think the company will succeed in restructuring, but we don't know how long it will take and we are increasingly dubious that industry conditions won't get worse, diverting cost reductions from profits to price cuts."
The dividend payments on the convertible may be deferred for up to 20 consecutive quarters, convertible analysts Marc Malloy and Yaw Debrah noted in a report Monday, but not beyond the stated maturity of the convertible.
In the event of deferral on the convertible, however, Ford will not be permitted to declare or pay any dividends on any of its common or Class B stock, preferred stock, or any other securities that rank equally with, or junior to, the issue.
Ford remains very liquid with $24.9 billion in cash at the parent level, the analysts noted.
"Moreover, Ford Credit has slowed its lending activity and reduced its leverage, and concerns that the company could default on its debt seem out of proportion," the analysts said.
"Unlike some recent spectacular business failures, Ford Motor, when run well, generates good cash flow, and Ford Credit's debt is offset with assets (car loans)."
Ford 6.5% convertible
| Price: | 35.72
|
| Stock price: | $8.32
|
| Parity: | 23.50
|
| Percent premium: | 51.98%
|
| Payback period: | 8 years
|
| Current yield: | 9.10%
|
| Call: | Jan. 15, 2007, at 51.63
|
| Yield to next call: | 16.93%
|
| Conversion ratio: | 2.8249
|
| S&P/Moody's: | BBB-/Baa2
|
| Theoretical value: | 37.45
|
| Discount to theoretical: | 4.62%
|
| Investment value: | 28.25%
|
| Investment premium: | 26.44%
|
| Parity delta: | 0.573
|
| Delta: | 0.377
|
| Implied volatility: | 13.98%
|
| Historical volatility: | 54.80%
|
| Annual stock yield: | 4.81%
|
| Credit spread: | 780, 811, 844 basis points (at 5, 10, 30 years)
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