I’ve taken a lot of heat in these parts for predicting that Ford’s bankruptcy bound. Having watched GM and Chrysler’s long march to Chapter 11, the signs seem pretty obvious to me: lousy branding, excess nameplates, non-competitive models, a pegged BS meter and a proven inability to take in more money than they spend. Yes, there are differences; his name is Alan Mulally. But, as The Detroit Free Press finally reports, The Blue Oval Boyz are burning down the house. Or, to put it more politely, “Even if Ford Motor Co. reaches all of its targets by 2011, the Dearborn automaker’s growing debt load could end up weighing the company down.” As far as euphemisms go, that one just went.
Today, Ford has $25.8 billion in automotive debt — much of which was accumulated to raise cash so the company could survive the economic downturn that it correctly forecast several years ago . . .
What’s more, Ford’s debt level could reach $36 billion by 2011, when Ford expects to be profitable again, Citibank analyst Itay Michaeli said in an interview with the Free Press. That is about four times more than Ford’s expected earnings. Healthy automotive companies usually carry about twice as much debt as earnings, he said.
Ah revisionism. Ford decided to mortgage itself up to and including its logo without any foreknowledge of the economic downturn. They did it to survive their sinking fortunes in a “normal” (which is to say vastly inflated) U.S. new car market. In fact, the company’s analyst was publicly predicting a bull market even as the bubble popped. And then forecast recovery approximately ten minutes after the market tanked.
Still is, actually. Pipas reckons the drought ends at the end of 2010, doncha know. FoMoCo better hope so.
With that high level of debt to earnings, Ford’s debt could strain the company’s finances as payments on it become due. One of those payments is $10.1 billion, due in the fourth quarter of 2011 . . .
“We gave guidance that our cash burn was $3.7 billion in the first quarter, which was substantially less than the fourth quarter, and we gave guidance that every quarter this year, it will get lower and lower and lower,” Mulally said. “That gives everybody confidence that we are on a positive track.”
Ford might well be on a positive track—cutting costs, suckling-up to the federal teat ($5.9 billion loan from the DOE for retooling thank you very much) and ratcheting-up a, wait for it, .6 percent NA market share gain. But the U.S. new car market is dead in the water. With Nissan’s Carlos Ghosn (and TTAC) predicting an extended downturn, well, it’s only a matter of time before Ford runs out of dough.
If a couple of other companies hadn’t been nationalized there would be enough oxygen in the market for the survivors to make some money. Now everyone gets to suffocate.
Right on RF!
I read that analysts are predicting Ford will need yet another debt-for-equity swap to stay out of trouble.
I don’t think it will work though…because Ford has yet to figure out how to turn a profit. And in Ford’s quest to move up market (by overpricing their appliances), they will push away their strongest customers. So, with no one able to afford a Ford…product will collect dust on the lots and money will be lost.
Ford might well be on a positive track—cutting costs, suckling-up to the federal teat ($5.9 billion loan from the DOE for retooling thank you very much)
I know Ford cheerleaders that deny they ever took Government money.
Some people have been waiting a long time for TTAC to say something negative about Ford (no names).
They will do a swap and they won’t have any trouble doing it, almost all of the bond debt has been traded (purchased) at around .15-.25 on the $, b/c everyone assumed they were going down as well, all ford has to do is offer the $ and shares to give them .35/$ and they will profit just as the first group of swaps did. Secondly, most of Ford’s debt is bank and they will refinance to the moon to keep Ford in business at this point.
Any rebound in sales will immensely benefit Ford due to the operating leverage. If Mulally can keep a lid on expenses, the debt load should not be an issue and Ford will refi its automotive debt easily when it comes due.
But – if sales stay at or below 10MM SAAR for the next year or so, then F is definitely in trouble.
Just before the downturn, Mulally was achieving a modest operating profit. There were losses below the line due to the huge debt load, but they were able to make money from the basic business of selling cars.
That’s a substantially different position from GM’s pre-11 condition, at which point it was bleeding money above the line — even if it had no debt, pension funding, etc., GM could still not sell cars at a profit. Ford will most likely be able to refi or cramdown debt in ways that GM could never have done without direct government assistance.
I’m sure that Mulally knows that he’s engaged in what amounts to financial hand-to-hand combat, but he had little choice in the matter. The darkest-before-the-dawn analogy often applies to successful business turnarounds. Victory is by no means assured, but he has a decent shot.
So, on the one hand we have the trumpeting of the inevitable failure of the new editions of GM and Chrysler and on the other we have the warning about how the continued existence of same dooms Ford.
I’m beginning to see a pattern here.
With Mulally’s leadership, and considering his on the job training is now complete, Ford will survive short term and prosper long term. Don’t forget, their dealers are not treated like unwanted stepchildren.
There’s a lot of bad finance here:
“What’s more, Ford’s debt level could reach $36 billion by 2011.”
Ford’s debt can’t go up by 10 billion or some 40% if it’s also going bankrupt. No one will give Ford money if they think that’s the case.
“That is about four times more than Ford’s expected earnings.”
He doesn’t really specify what earnings, but if it’s net income Honda is close to 10 to 1. Even with operating income Honda is 5 to 1. Typical leverage ratios in the auto industry have been pretty high because auto companies have real assets.
The most accurate gage of what the odds of a company going bankrupt is bond prices. Currently Ford Credit bonds due in 2011 are trading at 90 cents on the dollar at 9.375 interest. To me that says the company probably has about a 20% chance of going bankrupt by 2011 (without doing the math).
Ford sure seems to have the best shot at survival of the formerly “big” Detroit Three. Unfortunately, economics and simple math are not on their side. What are the chances of Ford ultimately caving and begging for bailout bucks if the negative cash flow math continues to…go more negative? When do they reach the point of federal mammary mastication inevitability? Maybe they have already. “Ford Suckle Watch”, anybody?
+1, toxicroach.
Perhaps the Ford family has a son or daughter who’d be interested in marrying a nice Quandt family member so that BMW and Ford could merge, in the manner of old-European princes and princesses from various monarchy states of old.
Seriously, though; a lot of the bankrupt players need to move aside and make room for healthy growth of competently run companies.
Ford should survive (USA)
Toyota will survive (J)
Honda should survive (J)
Hyundai (and Kia) will survive (ROK)
Mazda should survive (J)
Volkswagen should survive (D)
Nissan-Renault should survive (J/F)
Some of the smaller players have strengths hidden to American sensibilities.
Suzuki will survive (J) – six words; Kei cars and India market share
BMW should survive (D) but it’s by no means certain – see PSA
PSA should survive (F) if some of the other European players will die off and give it some space
That’s ten automobile companies. Worldwide.
Niche players such as Morgan “May” survive. For awhile.
@compy386:
Exactly what I was going to post.
There’s a lot of fuzz here. Their debt could be $36B by 2011? I doubt it. Even with government leverage, I don’t see Ford’s automotive debt above $30B in 2011 – and likely it will be around today’s level. As compy mentioned, other automotive firms are pretty highly leveraged right now, and that’s not going to change until into 2011/2012. There will likely be some debt-equity exchanges and Ford will probably issue more shares to generate additional cash down the road – all of which will help solidify the books.
If Ford Credit gets industrial bank approval, I see even more opportunity for Ford to stabilize its finances, but I see no mention of this, either.
This is a pretty negative look at Ford – it feels like some analyst has a lot of money riding on a Ford competitor. It ignores a lot of positive things that could go Ford’s way. They aren’t out of the woods yet, but at least they have a good navigator and are moving in the right direction – until something drastic changes, I think bankruptcy talk is premature.
What is the purpose of Mercury in this day and age? No unique products, a barely-visible brand image and their badge engineered Ford clones are hardly distinguishable. They remind me of Chrysler’s Plymouth. Pointless and wasteful duplication of marketing and administration.
Apart from Jill Wagner’s ads I doubt anyone would notice if they disappeared.
toxicroach,
that’s the single most important point in all of this, whether it be car companies, banks, home owners, etc. people don’t realize how much damage is being done to the “strong hands” and how much more damage is being done to the economy long-term.
“Niche players such as Morgan…”
Morgan a niche player? If they are, then so is my neighbor building a Faux-bra in his garage!
I thought BMW was a niche player, and they spend more on glove-box latch development in a year than Morgan’s gross sales!
Other than that, I agree.
Ford’s BK is as inevitable as was GM and Chrysler’s.
Those bondholders are bagholders.
It doesn’t take anything more than common sense to tell one that a still albatross-laden (with still high legacy costs, despite some concessions by the UAW) Ford, compared to a GM and Chrysler that shed far more fat through bankruptcy, is going to have an incredibly hard time competing in a sub 12mm, let alone sub 10mm, North American Auto Market, especially when the Asians aren’t letting up, and the Chinese are planning inroads and will soon be here, undercutting the South Koreans on price.
Ford has nowhere to run to.
Ford has the same unions that other big 1.5 have. I’m surprised how long they were able to pospone the inevitable.
a gleeful article – now my day is full of sunshine and hope
Buickman :
Don’t forget, their dealers are not treated like unwanted stepchildren.
I really can’t compare GM’s dealer treatment to Ford’s. I have worked for neither company nor any of their dealers.
What I can say is that Ford has been far from perfect. The dealer development program was controversial and managed to make a lot of dealers really angry.
Business hurts, even good business. But Ford has managed to slam the door on a lot of dealers.
Some recent sticker prices I have seen walking the lots – Focus, 19.6K. Elantra, 19K. Base Fit with auto, 18K.
Car prices are too high relative to the incomes of the mass of Americans, who form the mass market. Top down solutions such as giving money to banks will not solve the problem. Only a bottom up solution will work. In WWII, Americans all had jobs, with all the overtime, they wanted. With rationing, and no new cars or houses, they had a lot of cash in their pockets after the war.
Since even the imports are unaffordable, we will not have recovery until the govt figures out how to get more income into our pockets. So look for more top down “solutions” such as giving cash to Ford, which won’t fix anything.
Matt, cars life longer so their resale value after some years is much higher. This leads to lower new car depreciation so new car prices can be higher.
Menno: Russia wants a car company(Oпeл) and China will have their own car companies. Maybe FIAT will survive and than you still have India(likely) and Iran/Middle East(small change)
Stagflation, differential accumulation. Korea and China will fill the void with less expensive properly contented motor vehicles.
“Ford should survive (USA)”
Yeah, they should. Especially since their vehicles are really starting to get good. Fiesta and worldwide version of the Focus on the way.
That debt load is massive though.
Debtholders will either work with Ford or get next to nothing, ergo they will most likely work with Ford now that they have witnessed the GM/Chrymoco carnage. It would be too risky and stupid for them not to either take equity or refi to hell and back. Their current debt load is not as big an issue as made out to be at this time because all their debt holders know what will happen otherwise.
@RobertSD
This is a pretty negative look at Ford – it feels like some analyst has a lot of money riding on a Ford competitor.
Or someone shorting F.
And Robert, Niedermeyer made the same post three weeks ago.
Are you guys having to recycle your doomsday scenarios? ;-)
I know Ford cheerleaders that deny they ever took Government money.
That is simply because this is the case. If you do not understand the difference between a loan, that is repayable, and a massive corporate bail out, which is not, it is back to kindergarten for you.
Sorry Robert, your passionate desire to call the demise of the entire domestic auto industry is flawed. Just because you scored two hits with GM and Chrysler does not mean you will make it 3 out of 3.
Ford is very well placed indeed simply because unlike almost every other auto company out there, they have left their PD costs alone despite all the other cost cuts. Even assuming a small increase in the SAAR, Ford will be in a good position. If the SAAR increase any further, Ford will be the turbo machine that Mulally has predicted. Bear in mind the product that Ford has already launched and will launch over the next 12 months and you will see that they are sitting pretty.
Sorry, but I do not share your pessimism and neither does Wall Street.