Ford Cuts Nearly $2 Billion in Debt - Analyst Blog

Ford Motor Co. (F) has reduced its debt by more than $1.9 billion by swapping its investor's notes for shares. The investors converted $554 million of the company's 4.25% Senior Convertible Notes due December 15, 2036 and $1.992 billion of its 4.25% Senior Convertible Notes due November 15, 2016.

In exchange, Ford paid $534 million in cash premiums and issued 274 million shares of its common stock to the convertible note holders. The conversion offer will result in a special item charge of about $960 million for the fourth quarter of the year.

The debt-for-stock conversion offer helped Ford to reduce its annualized interest costs by about $180 million. In fact, the automaker has slashed its annual interest costs by almost $1 billion by cutting its debt by about $12.8 billion since the beginning of the year.

At the end of the third quarter, Ford's debt in automotive operations stood at $26.4 billion by paying down $2 billions of its revolving credit line. Further, the automaker repaid the remaining $3.6 billion it owes to the Voluntary Employee Beneficiary Association (VEBA) retiree health care trust.

Thus, the VEBA payment and the conversion offer have lowered the company's debt in automotive operations to $20.9 billion compared with about $19.8 billion in gross cash. The company expects its net cash position to be positive for 2010 given its profitable automotive operations and a special dividend payment of $1 billion from its financial arm, Ford Credit.

The debt reduction measures are expected to help Ford to secure an investment grade rating, which was lost in 2005 on the back of rising gasoline prices and falling truck sales.

Last month, Moody's Corporation (MCO), has upgraded its ratings outlook on Ford from B1 to Ba2 – two notches below the investment grade – based on improved operating performance of the automaker. It was, in fact, an upgrade from CAA3 – nine levels below investment grade – assigned by the rating agency in December 2008, when the global economic crisis kicked in.

The rating agency has also raised Ford's probability of default rating from Ba2 to B1 and senior unsecured ratings of Ford Motor Credit Company and related companies from Ba3 to Ba2. It has affirmed the rating outlook for Ford and Ford Credit as stable.

Ford, a Zacks #3 Rank (Hold) stock,showed an $1.04 billion rise in profit to $1.91 billion or 48 cents per share (before special items) in the third quarter of the year from $871 million or 26 cents per share (before special items) in the same quarter a year-ago. The profits surpassed the Zacks Consensus Estimate by 10 cents per share during the quarter.

The increase in profit was fueled by the strength of Ford's new products, consistent improvement in performance at Ford Credit as well as a recovery in the North American automotive market.

Total revenues slipped 4.3% to $29 billion, including revenues generated from Volvo cars in 2009. This compared with the Zacks Consensus Estimate of $28.16 billion. However, excluding revenues from Volvo, sales improved $1.7 billion or 5.6% from the third quarter of 2009.

 
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