Another bold debt-reduction move from Ford
This latest move lowered Ford's annual interest expenses by about $180 million and brought the company one step closer to a long-sought goal: a return to an investment-grade credit rating.
So here's the question: Is it time to stop worrying about Ford's debt?
A lot of progress in a short time
This latest milestone was the result of debt-for-stock conversion offers that the company launched last month and enticed convertible-bond holders to exchange over $1.9 billion of bonds for 274 million new shares of stock and about $534 million in cash inducements. The company said in a statement that it will book a $960 million fourth-quarter charge for the exercise.
This move brings Ford's "automotive debt" (the company's term for the debt that matters -- i.e., connected to its carmaking operations, not debt carried by its financial-services unit) down to about $20.9 billion, its lowest level in a long time. That's a $12.8 billion reduction so far this year, representing an annual savings of about $1 billion in interest costs.
A billion dollars is a lot of money, even for a major auto company. It's enough to develop a major new model from scratch, or significantly refresh a few existing ones, or upgrade several factories, or fund a huge global marketing program. An additional $1 billion a year could give Ford's already very competitive product program a significant nudge forward.
But whether the company spends it on product or marketing or something else, Ford was doing pretty well on all of those fronts already. This can only improve the company's ability to execute around the world. You think General Motors
How about that credit rating?
Ford's $20.9 billion debt load is now only slightly higher than its cash hoard, which is estimated at $19.8 billion. Just a few months ago, CFO Lewis Booth predicted that cash would exceed debt by the end of 2011, a prediction that was widely received as surprising good news. Could the company really have made that much progress that quickly? Apparently so: Booth and CEO Alan Mulally subsequently revised that prediction, saying in October that Ford would reach the cash-exceeds-debt milestone by the end of this year. It's looking awfully likely: The $1 billion dividend due from Ford's finance arm before the end of the year will nearly close the gap by itself.
That's huge. Ford famously mortgaged everything it could in 2006, borrowing $23 billion in a last-gasp effort to survive long enough for its all-or-nothing turnaround plan to get traction. That drove the company's credit rating deep into junk-bond territory, but the success of the turnaround has already brought several upgrades, including a two-level boost from Moody's in October.
Now, some analysts are saying that Ford could reach investment-grade status by the middle of next year. That would be a big deal, not only as an immensely satisfying turnaround milestone, but also because it would lower Ford's ongoing borrowing costs still further, allowing it to further upgrade its product lines and accelerate its global expansion in markets such as China -- where Ford just announced the opening of 66 additional dealerships in the next month or so -- and India.
The upshot
Although Ford chose to broadcast its debt reduction on the eve of a holiday weekend, this latest move is big news for shareholders. Ford's already on a tremendous roll, with its financial position improving as its product push is bearing impressive fruit, and these moves to reduce the cost of the company's debt load can only improve its position.
More to the point, Ford's debt load has been a point of concern for investors even while the company's recovery has been so impressive. As that debt load shrinks, and Ford's credit rating continues to improve, that concern will continue to fade -- and that seems likely to bode well for the stock price.
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