Ford Motor has opportunistically improved its balance sheet in a campaign to regain investment-grade debt ratings without resorting to bankruptcy. "In 2009, we worked with the rating agencies to understand what it would take to reach investment grade," says Treasurer Neil Schloss. "Then we developed a robust and systematic plan that would eventually lead the company back to investment grade."
Ford's decision not to seek bankruptcy always meant that it would be competing with domestic rivals that had washed debt off their balance sheets. And that required Ford to be tough. Even after debt restructuring in early 2009 reduced the total by $10 billion, Ford had $26.1 billion worth of debt in mid-2009, almost $5 billion more than its cash; retiree healthcare obligations would push that debt up to $34 billion by the end of the year.
"Interest costs were not sustainable–putting us at a competitive disadvantage–and left us with no margin for error if the economy took a second dip," notes CFO Lewis Booth.
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Auto companies have to compete, and they can't compete on car design and sales alone. Up against manufacturers with higher credit ratings and a lower cost of funds, some as a result of bankruptcy, Ford's finance leaders had to come up with a plan to eliminate that critical disadvantage.
The situation called for classic project management: define the relevant metrics, set targets based on those metrics, develop a plan to hit the targets, and follow through to see that the plan was executed. The goal: bring debt ratings up to investment grade. Ford's projections showed that operational metrics (profit, after-tax return on sales, EBIT to revenue) would get to investment grade faster than the balance sheet. Heavy debt was a drag on Ford's progress. It had to accelerate improvement in its capital structure and balance sheet metrics.
While the operating team pushed to improve results, debt reduction actions were prioritized. But Ford had to retain enough liquidity to survive if the economy turned down again. So it calculated a liquidity cushion, based on cash balances coming from the business plan, to see how much cash was available to pay down debt without jeopardizing product spending and other calls on capital. "Every quarter we look at our available liquidity to see what actions we can take," Booth says. Debt still exceeds cash by $5 billion, but Ford expects to become net cash positive in 2011.
Ford started the process with the 2009 restructuring of $10.1 billion in debt that reduced debt and lowered its interest expense by $500 million annually. Also in 2009, Ford qualified for a $5.9 billion low-interest loan from the Department of Energy to develop and produce advanced technology vehicles. Secured credit facilities were amended and extended to lock in liquidity, and the company raised $6.5 billion by selling stock or doing equity-linked transactions. In the first half of 2010, Ford reduced its debt by another $7 billion by using cash to pay down $3 billion of its secured revolver and $4 billion owed to the UAW Retiree Health Care Trust.
All the actions Ford has taken are working. Since December 2008, it has moved up five notches on Moody's credit scoreboard, from Caa3 to B1, and three on S&P's, from CCC+ to B+.
"Our credit default swaps are trading at levels even higher than those ratings, so the market likes what it sees," notes Schloss. "We still have four notches to go to achieve investment grade, but we're making good progress."
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