A Treasury Group That’s Accelerating Investments in Sustainable Transportation

The winner of the 2023 Gold Alexander Hamilton Award in Liquidity Management is ... Ford Motor Company. Congratulations!

When the Covid-19 pandemic hit in 2020, Ford Motor Company was in the midst of a major strategic transition. The company was redesigning its product lineup to feature more electric vehicles (EVs), such as the Mustang Mach-E and F-150 Lightning, as well as hybrids like the Maverick pickup and Escape SUV. Ford was also working on introducing a modern version of a beloved classic, the Bronco.

“We were redesigning our business and restructuring automotive operations around the world,” explains Dave Webb, vice president and treasurer of Ford. “At the start of 2020, we were making progress toward our electrification strategy. The future looked bright.” That outlook dimmed a bit as the pandemic led Ford to suspend vehicle production around the world.

“In mid-March, production came to an immediate standstill,” Webb says. “So did revenues and cash flows associated with that production. There were a lot of unknowns, including when we would be able to get workers back on manufacturing floors to resume production. Shortly after we shut down our facilities, the ratings agencies downgraded Ford to below-investment-grade.”

The company entered the Covid crisis with strong liquidity. “Following the 2008 financial crisis, we had emphasized stress testing, being prepared, and leaning on conservative liquidity planning,” Webb says. Still, liquidity was a key concern as the pandemic took hold; Ford’s free cash flow for the first two quarters of 2020 was negative $7.5 billion. “Revenue wasn’t coming in, but we continued to pay our suppliers and employees, doing what was necessary to keep our global enterprise going.”

Webb and his colleagues were concerned about not only surviving in the short term, but also maintaining the capacity to invest in Ford’s electrification future. Their stress-testing program provided insight into the company’s liquidity and risks so that they were prepared to take quick action.

“In January, even before Covid had spread beyond the borders of China, we stood up a team to run a variety of scenarios,” Webb says. “In one of those scenarios, Covid became a pandemic that shut down our global operations. We didn’t necessarily think that was going to happen at the time, but we planned for it nonetheless. So when that scenario became reality, we knew what it meant and how it would impact our cash and liquidity.”

Ford immediately began preparing a series of actions, both for operations and financing, that it could deploy depending on how effects of the pandemic played out. “All our planning enabled us to quickly mobilize and decide which ripcords to pull,” Webb says. The company eliminated all discretionary spending, suspended its quarterly dividend and share repurchase programs, lowered operating costs, reduced capital expenditures, and deferred portions of executive salaries.

Ford also drew its entire $15 billion revolving line of credit. “We put that cash on the balance sheet so that we would have it available, regardless of what happened,” Webb explains. “We felt good about the soundness of the banking system, but you can never know anything with absolute certainty. Given all the other issues our business was facing, we couldn’t tolerate any additional risks.”

Webb points out that Ford also repurposed some assembly lines to produce pandemic-related supplies. “Despite the tremendous stress we were under, we recognized that we were combating something much greater than Ford itself,” he says. “We went to work figuring out where else we could help, and that involved mobilizing our plants and our people to produce equipment that the healthcare system needed, including masks and ventilators.”

Then, in mid-April, Ford identified a narrow window in which it could issue new debt. “The markets were very fragile,” says Ryan Hershberger, Ford’s director of global funding and capital markets. “We positioned the transaction carefully, explaining that it would give us enough liquidity—along with the other actions we had taken—to get through 2020 without building another vehicle, if we had to. That gave the market confidence that Ford would still be OK on the other side of Covid.”

Ford issued $8 billion in unsecured bonds across 3-year, 5-year, and 10-year tranches. The transaction had an order book north of $40 billion and was recognized after the fact as the “U.S. dollar deal of the year,” Hershberger says. It remains the largest unsecured debt transaction in Ford’s history, and the largest high-yield debt transaction completed by any company for purposes other than mergers and acquisitions (M&A). Also noteworthy, Hershberger says, is that “the transaction was executed on a Friday, which is generally a no-go for high-profile deals.”

Webb adds that in order to very quickly take advantage of the market opportunity, Ford pulled its quarterly earnings announcement forward by a couple of weeks. “I’m not aware of any other time in our company’s history where we have pulled earnings forward to facilitate something like this,” he says. Getting quarterly earnings data out in half the usual time required a lot of extra work, particularly from Ford’s finance team.

“It was a cross-functional effort,” Webb says. “And our colleagues across finance, accounting, operations, investor relations, communications, and legal all did what was necessary to make it happen.”

The April 2020 bond issue provided liquidity at a crucial time for Ford. However, when manufacturing lines began to reopen later that year, Ford treasury needed to reconsider its debt once again. The coupons on the unsecured bonds ranged from 8.5 percent to 9.625 percent. “We had taken on a significant amount of high-cost debt to provide stability amid the Covid storm,” Webb says. “Once we saw our way through the crisis, we began thinking about our longer-term strategy and how to get our balance sheet back to where we wanted it.” Thus began the second part of Ford’s liquidity transformation.

“We developed a plan that was forward-looking and supportive of our corporate objectives,” Webb explains. The plan consisted of several different moves to reduce the high-priced debt on Ford’s balance sheet, and getting there took more than a year. “We were originally planning to do it all at once, but the convertible bond market was so strong in early 2021 that we started there.”

In March 2021, Ford issued $2.3 billion in 0 percent convertible bonds with an implied price for Ford’s stock at a 20-year high. “We hit the nail on the head in that regard,” Hershberger says. “We were also an early mover in adopting the new ASU 2020-06 accounting standards, which treated the bonds as debt. This made the 0 percent convertible very attractive as a funding instrument relative to debt costs and equity dilution at the time—and even more so today.

“It was a great piece of financing,” he adds. “A key was to maintain an ongoing dialogue with Ford’s board of directors and banking partners so that we would be ready to execute when the right market window opened. Being prepared really paid dividends for the organization.”

Next, in September 2021, Ford completed the renewal, extension, and transformation of its revolving credit facility. “Even a year and a half into Covid, the world remained an uncertain place, and we wanted to extend this liquidity,” says Jason Behnke, assistant treasurer. “The bank group supported us tremendously; the fact that we had very little turnover in the banks was a real show of confidence.” The bank group includes 60 institutions, and the $15.5 billion revolver was one of the largest corporate credit facilities in the world.

Ford worked with its lenders to include three key performance indicators (KPIs) that focus on environmental, social, and corporate governance (ESG) objectives. The revolver’s interest costs and facility fees rise or fall depending on the company’s performance relative to these ESG KPIs. Another notable aspect of the amended credit facility is that its pricing is based on the Secured Overnight Financing Rate (SOFR). Ford’s revolver was the first to transition away from LIBOR, and by setting the example, the company helped accelerate the market’s transition to the new benchmark rate.

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Two months later, in November 2021, Ford and its captive finance company, Ford Credit, jointly introduced a sustainable financing framework (SFF) that laid the groundwork for the issuance of green, social, or sustainable bonds. This was the first SFF to be released by an American auto company, as well as the first SFF released jointly by an original equipment manufacturer and its captive finance company. In addition, the framework received the highest rating from Vigeo Eiris, an external ESG ratings firm. Its development was a team effort among functions throughout Ford, including the sustainability and capital spending departments.

“The framework enables us to issue debt allocated to four specific areas of ESG: clean transportation, clean manufacturing, making lives better, and community revitalization,” Hershberger says. “Our transition to electrification has come in lockstep with a significant acceleration in calls on capital. By following the SFF framework, we can help fund that transition in a way that is both sustainable and efficient.”

Also in November 2021, following publication of the SFF, Ford issued its first green bond, a 10-year issuance whose proceeds are funding the development of Ford’s EV portfolio. “Investor response was off the charts,” Behnke says. Ford intended to issue $1.5 billion, but when the order book exceeded $10 billion, the company ended up issuing $2.5 billion at an interest rate of 3.25 percent—at the time, the largest corporate green bond ever completed and the lowest coupon for a public debt issuance by Ford since 1979.

Finally, Ford treasury launched a tender to buy back or redeem its legacy high-cost debt, including a substantial part of the $8 billion in Covid bonds. “We did a typical liability management transaction in conjunction with the green bond offering,” Webb says. “And again, interest from investors exceeded our expectations.” Ford’s initial target for the transaction was $5 billion, but the company ultimately redeemed $7.6 billion of high-cost debt.

“Through these transactions, we replaced much of our high-cost debt with very low-cost debt, going from interest rates in the 8 percent to 9 percent range to around 2 percent,” Webb says. “In one fell swoop, we made a meaningful change to our debt profile and significantly reduced our ongoing interest costs.”

By transforming its balance sheet, Ford built a liquidity structure that is now helping accelerate investment in sustainable transportation. Webb says collaboration was key to making this happen: “Not only are we connected with other internal teams, but we also work very closely with our banking partners. They’re the ones that have their fingers on the pulse of the markets. During some of these transactions, we were talking to our banks daily, or even hourly, to understand our options and when we should pull the trigger.”

Behnke adds that continuous communication with the Ford executive team enables treasury to stay agile. “Ford leadership looks to treasury in times of stress, and they give us the flexibility to act quickly,” he says.

“Treasury has the inherent trust of the Ford management team, and we are empowered to do what is necessary to fund operations,” Webb concludes. “With this project, we executed our liquidity plan and provided certainty to the business. At the same time, we ensured that our actions were strategic, helping us drive growth and move corporate strategy forward. We built a financing platform that continues to allow us to deliver the funding Ford needs for the transition to electrification.”

In addition, the work to transform the balance sheet following Covid, combined with improved operating performance, helped catalyze Ford’s return to investment-grade in the fourth quarter of this year.

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