Ford pays another $4B USD off its debt

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Wednesday, Jun 30, 2010 15:17 ET
Ford Motor Company knocks $4 billion off its debt
The only American automaker to avoid bankruptcy pays $3.8 billion to UAW fund, dividends on preferred securities

By TOM KRISHER, Associated Press

Ford Motor Co., the only Detroit automaker to avoid bankruptcy protection, said Wednesday it will reduce its huge debt by another $4 billion as it continues to show signs of financial strength.

The Dearborn, Mich., automaker will pay $3.8 billion in cash to a United Auto Workers trust fund that pays retiree health care bills, and it will pay out $255 million in dividends on preferred securities that had been deferred as the automaker worked its way through financial troubles. The company now will make quarterly payments on the securities, which are a combination of preferred stock and bonds.

Ford CEO Alan Mulally said in a statement that the payments are another sign of confidence that the company's restructuring plan is working.

"We expect to continue to improve our balance sheet as we deliver on our plan," Mulally said.

After the payment, Ford will still owe the UAW trust about $3.6 billion due by 2022, with an option to pay it over three years. The company said it intends to repay the note early but wouldn't say when.

Shares of the automaker rose 51 cents, or 5.1 percent, to $10.39 in afternoon trading.

The automaker said the actions combined with a $3 billion debt payment in April will reduce its total debt to around $27 billion from $34 billion at the end of the first quarter. The payments will save Ford roughly $470 million in annual interest costs.

Ford was forced to mortgage its factories and even its blue oval logo to borrow more than $23 billion in 2006 and 2007. But the move helped it avoid bankruptcy protection, unlike Chrysler Group LLC and General Motors Corp.

Recently Ford has reported sales gains and four straight quarterly profits. It earned $2.1 billion in the first quarter, helped by higher transaction prices for its cars and trucks, which have been getting high quality ratings from third-party groups such as Consumer Reports magazine and J.D. Power and Associates.

Ford sales are up more than 30 percent through May, almost double the 17 percent increase in total U.S. car sales.

Analysts for Barclay's Capital and Moody's Investors Service said the announcement is a sign of confidence that Ford can generate cash to repay debt.

"Ford continues to benefit from strong operating performance in North America due to a competitive product lineup, a disciplined pricing and production strategy, and a significantly reduced break-even level," Moody's said in a note to investors.

Even before the debt reduction announcement, Citigroup Global Markets analyst Itay Michaeli upgraded Ford shares to "Hold" from "Sell." He noted that Ford shares have dropped 32 percent from highs after a strong 2009 performance.

As the U.S. auto industry headed toward financial disaster in 2007, the UAW agreed to set up trust funds that would take on enormous health care payments for Ford, GM and Chrysler retirees. Ford made initial payments to the trust and agreed to pay roughly another $7 billion.

Ford will make a $3.8 billion payment to the trust on Wednesday, including $860 million in cash on two notes that were due Wednesday. The company had the option of paying one of the notes in stock, but chose to pay in cash. The remaining $2.9 billion will retire a note early and come from $1.6 billion in Ford cash, plus $1.3 billion from Ford's credit arm. The payment from Ford Motor Credit Co. is instead of a tax payment that it would have made to the parent company.

In March, the trust raised $1.78 billion by selling warrants to buy the automaker's stock.

It pays health care bills for more than 200,000 retirees and their spouses. Ford agreed to fund the trust with a total of $14.8 billion in cash and other assets.

Ford executives have conceded that the company's debt puts them at a competitive disadvantage to GM and Chrysler, both of which shed much of their debt with stays in bankruptcy protection last year. Chrysler had $17.5 billion in debt before bankruptcy but now has roughly $11.2 billion, while GM had $104 billion before bankruptcy and now carries $15.4 billion.