Ford Q2 profit falls - but liquidity position remains strong, bank credit ample

By Paul Deckelman

New York, July 19 - Ford Motor Co. reported that its second-quarter profit fell to $946 million (47 cents per share) from $1.2 billion (57 cents per share) a year ago, a 19% slide, chiefly due to a sharp decline in the performance of the Dearborn, Mich.-based automotive giant's core North American vehicles unit, which led to a pre-tax loss of $907 million for that sector versus year-ago earnings of $454 million.

However, Ford - the second-largest domestic car and truck maker and one of the largest automotive companies in the world - got a lift from the strong performance of its Ford Motor Credit Co. financial arm, as well from its overseas automotive operations, which include such famous nameplates as Land Rover, Volvo and Jaguar.

Ford - widely considered to be one of the three or four largest issuers of corporate debt in the world - also reported a fall in its overall debt levels, and ample liquidity and bank credit availability.

As of the end of the second quarter, the parent automotive company reported a gross cash balance of nearly $22 billion, while Ford Credit had nearly $19 billion of cash in the till. Its managed leverage was 12.8 to 1 at the end of the quarter, Ann Marie Petach, Ford's vice president and treasurer, said on a conference call with fixed-income analysts following the release of the earnings data

As of June 30, Ford and its subsidiaries showed total consolidated balance-sheet debt of $158.441 billion, down from $172.973 billion as of Dec. 31, 2004. Total consolidated liabilities stood at $276.834 billion, including $14.203 billion of shareholders' equity, down from $293.858 billion of total liabilities and shareholders' equity, which included $16.045 billion of the latter. Consolidated cash and cash equivalents stood at $30.133 billion as of June 30, versus $23.510 billion as of Dec. 31.

Petach said that Ford and Ford Credit "have successfully completed our annual bank-line renewal process," with the amount of credit available to Ford and its financing arm totaling $31.5 billion as of July 1, which is down some $900 million from the $32.4 billion of facilities available as of Dec. 31, 2004.

Total asset-backed commercial paper facilities stood at $18.8 billion, up $800 million from year-end 2004, which Petach said represented a transfer of a portion of Ford's and Ford Credit's unsecured lines to support these lines.

"Our bank credit facilities continue to be high quality, with no ratings triggers, material adverse change clauses or financial covenants," she said, "and the majority of our commitments remain five-year facilities."

Ford Motor Credit liquidity

Looking at the fiscal status of Ford Credit, which has assumed the role of perhaps the key profit driver for the company, with earnings of $1.2 billion in the latest quarter - Ford Credit clearly has ample liquidity available. As of June 30, total liquidity stood at $75.5 billion, including $31.5 billion of committed credit facilities, unused bank conduit capacity of $10.3 billion, and almost $19 billion of cash, among other liquidity sources.

Liquidity exceeds utilization by $43 billion, Petach said. As of June 30, a total of $32.5 billion was being utilized. "This liquidity provides flexibility in executing our funding plan," the executive said.

"As we have emphasized in the past, Ford Credit's balance sheet is inherently liquid, because of the short-term nature of its assets."

As of June 30, the credit unit had $117 billion of cash and interest-bearing assets on hand, versus $96 billion of interest-bearing debt, with both figures excluding on-balance-sheet securitized assets and securitization debt. Some $54 billion of the assets and $19 billion of the debt had maturities of three months or under, and cumulatively, $96 billion of the assets and $55 billion of the debt had maturities of under two years.

Petach further said that as of June 30, Ford Credit had about $160 billion of managed receivables - down from $168 billion at the end of 2004, but about $5 billion more than it expects to have at the end of 2005. While a small amount - $3 billion - is funded with unsecured commercial paper and another $23 billion is funded via asset-backed commercial paper, the largest portion is funded via term debt and other means. The treasurer said that Ford has about $19 billion of cash and cash equivalents on hand to fund these receivables, well above the $13 billion to $15 billion it has projected for year-end.

"We plan to continue to have a large cash balance," she said, adding "this level of cash provides us flexibility in the execution of our funding plan this year and next."

"A pretty good period of funding"

Petach said that since the end of the first quarter on March 31, Ford Credit had completed a total of $15 billion of unsecured and asset-backed term funding. Including the first two weeks of July, the subsidiary raised $3.9 billion in the unsecured market and $11.1 billion in the asset-backed market.

In the private and public asset-backed market, Ford Credit sold retail, wholesale, extended contracts, red-carpet lease and Italian wholesale assets, Petach said, while parent Ford Motor Co. completed its $2 billion seasonal financing - a 60-day facility with many of the company's bank partners - earlier this month. Along with the renewal of the Ford and Ford Credit bank lines, the treasurer said, "it was a pretty good period of funding."

During the question-and-answer portion of the conference call following the formal presentation, Petach, when asked whether the company was still sticking to its earlier assertions that its desired spinoff/sale of its Hertz car-rental business will be structured in such a way that it will be favorable to Hertz bondholders as well as Ford shareholders, said only that "it's premature to say exactly how the transaction will be structured, because we are considering all alternatives."

She added that "our bondholders, in aggregate, are very important to us, and we recognize their importance to Ford Credit."

The Ford executive specifically declined to say whether maintaining the investment-grade ratings on Hertz will be "an important consideration" when structuring the deal. Ford filed last month with the Securities and Exchange Commission for an initial public offering for most of Hertz and is planning on divesting its remaining ownership interest in the company, though no firm buyer has yet been found.

No timing has yet emerged on that IPO; Petach said that "the great news is that we don't have a situation, either from a company perspective or from an asset perspective, where there is an artificial timeline driving us. We'll make the decision when it feels right."

Small bond buybacks

Asked by another analyst about the company's apparent failure to buy back any outstanding debt during the second quarter and what the company's expectations are for future buybacks - he wondered "why you wouldn't buy back debt when it appears that it was so low on a dollar price?" - Petach said that Ford "actually did buy back a little bit, but it was under $100 million. I think we just make a balance between the cash that we have available for the business in general and how those overall spreads look. Clearly, it would slow down what we're doing, but we would leave ourselves the opportunity to buy it - though I can't say I have any present plans" to do so.

Petach noted that three of the four major rating agencies consider Ford to be investment grade. While Standard & Poor's downgraded the company's ratings to BB+ in May, Moody's Investors Service has the parent company's bonds at Baa3 and Ford Credit's at Baa2, Fitch Ratings has both at BBB, which the Dominion Bond Rating Service has Ford at BBB and Ford Credit at BBB (high). Moody's has both entities' outlooks under review for a possible downgrade - necessarily to junk for parent Ford - while the other three services rate Ford/Ford Credit's outlook as negative.

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