Posted on 11-10-2002
Ford
Motors Can't Pull Debt Load
By GRETCHEN MORGENSON, NYT
10 Oct02 Photo shows William Clay Ford, Jr.,
chairman and chief executive of Ford Motor Company
Debts $US170 billion, net worth = $US7.8 billion
What made shares of the Ford Motor Company plummet yesterday
for the second
consecutive trading session? The answer, investors and credit
analysts say,
was nothing and everything.
Nothing, because there was no bad news about car sales in general
or Ford's
operations in particular to prompt yesterday's 7.7 percent decline
in the
stock. Everything, because investors seem to be awakening to
a host of
weaknesses in Ford's financial position.
Ford, mostly through its Ford Motor Credit unit, carries a staggering
debt
load. It faces lingering questions from investors about how
it presents its
cash position and concerns about its ability to finance long-term
pension
and health care obligations to workers. Add to this the perception
that the
economy may be weakening, and it is not surprising that Ford
securities
have been punished in recent days.
Still, the viciousness of this week's decline took some investors
by
surprise. Ford's shares traded as low as $6.90 yesterday, but
rallied a bit
to close at $7.15, their lowest level in 10 years. They are
down 16 percent
on the week.
The move in Ford stock yesterday seemed to reflect a change
of heart among
stock analysts who had been, until fairly recently, sanguine
about the
automaker's future. Rather than focus strictly on Ford's operations,
equity
analysts now seem to be homing in on the company's balance sheet
as well.
And they do not like what they see.
Salomon Smith Barney removed Ford from its recommended list
of stocks
yesterday, citing the precipitous decline in the shares and
liquidity
concerns.
The more that investors focus on company balance sheets, the
more anxious
they seem to become about heavy corporate debt or a company's
dependence on
capital markets. Investors seem to have concluded that a company's
future
can depend less on its operations than on its ability to finance
those
operations.
Unfortunately, the capital markets have shut their doors to
many companies.
According to Moody's Investors Service, $6 billion was raised
in corporate
speculative-grade bonds in the third quarter, almost 18 percent
less than
the amount raised in the comparable period last year and far
below the $29
billion generated by issuers in each of the first two quarters
of 2002.
Stock analysts' fresh concern over Ford's balance sheet is old
news to some
independent credit analysts who have expressed worries about
Ford's
financial position for months. While the major debt rating agencies,
Moody's and Standard & Poor's, still rate Ford's debt investment
grade,
analysts at Egan-Jones Ratings, an independent credit analysis
firm in
Wynnewood, Pa., downgraded Ford to junk bond status in January.
And Carol
Levenson, high-grade bond analyst at Gimme Credit, an independent
research
firm in Chicago, puts Ford among the bottom 10 corporate debt
issuers for
its deteriorating credit quality. She advises her clients to
steer clear of
Ford debt.
An increasingly negative view on Ford among bond investors is
problematic
to the company and its financing arm, Ford Motor Credit, which
is the
largest issuer of corporate debt in the nation. While Ford's
cash position
improved in the most recent quarter, the company and its financing
arm had
long-term debt of approximately $170 billion.
Servicing this debt is becoming a bigger burden for Ford. According
to
Egan-Jones, in December 2000, Ford's operating earnings were
just about
double its interest expense. Recently, these earnings came in
at less than
half the expense. And shareholders' equity at the company, its
net worth,
has fallen from $19 billion at the end of 2000 to $7.8 billion
in the most
recent quarter.
When bond investors sour on a company's prospects, higher borrowing
rates
are a result. Though rising costs for financing are never a
plus, Ford will
especially suffer from higher costs because of its zero percent
financing
deals to car buyers.
"The company has barely been making enough money to cover its
interest
expense over the last year," Mr. Egan said. "There's also the
issue of
unfunded pension liabilities. Ford is right on the edge of the
precipice;
if they have a 50 or 100 basis point increase in funding costs,
things
break down very quickly." Ford management has said that its
financing needs
in 2003 could be $22 billion to $32 billion.
If the company had to come to market now it would be forced
to pay up. In
just the last two weeks, yields on one Ford Motor Credit issue
have risen
1.25 percentage points, from 8 percent to 9.25 percent.
It is a measure of investor anxiety regarding Ford debt that
the Ford
Credit issue maturing in 2011 and paying a coupon of 7.25 percent,
began
the day at a yield of about five percentage points above a Treasury
security coming due at the same time. By the end of trading
yesterday, the
yield on that issue had grown to six percentage points more
than the
Treasury's.
"Ford has become a lightning rod for all the specters haunting
high-grade
bond investors these days," Ms. Levenson said. Last month, for
example, an
analyst at Goldman, Sachs wrote a report saying that Ford overstated
its
cash position by $10 billion because of the way it accounted
for its
no-interest loans. In an unusual move, Ford challenged the analyst's
report
in a filing with the Securities and Exchange Commission, stating
that its
accounting was proper and that the effect of the treatment was
"less than
half" of the $10 billion cited by Goldman. Nevertheless, questions
of
accounting transparency hang over the company, Ms. Levenson
said.
The assumptions that Ford makes on expected profit from pension
investments
are another concern. The company is estimating 10 percent annual
returns,
Mr. Egan said, which he called far too optimistic. At the same
time, he
said unfinanced pension liabilities at the company run $5 billion
to $10
billion.
"There has been a shift in the bond market within the last few
days," Mr.
Egan said. "People are more concerned about the company getting
into
difficulty."
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