Ford Motor Co. has made arrangements to borrow as much as $18 billion in a massive bet that by pledging its assets as collateral, it can take advantage of buoyant debt markets to help pay for a difficult and costly restructuring.

The 103-year-old auto maker will offer nearly all its U.S. automotive assets and holdings in Ford Motor Credit Co. and its Volvo unit as collateral for much of the new debt. The move emphasizes the depth of the trouble Ford must escape as falling U.S. market share and high labor costs hit its operations, hurting its ability to borrow without backing from pieces of its business.

Ford mentioned the plans in October saying it expects to obtain $15 billion in secured loans, comprising an $8 billion, five-year credit line from banks and a $7 billion loan that will be held by institutional investors, including hedge funds. The borrowing amount is roughly equal to Ford's market value.

It is unknown if Ford will draw immediately on its credit line. Another $3 billion of unsecured financing is also planned, which could include notes that can be converted into its common stock. J.P. Morgan Chase & Co. is arranging the debt package, along with Goldman Sachs Group Inc. and Citigroup Inc.

Ford's arrangement buys time for the company, but is no guarantee of a turnaround, which will rely on its ability to produce cars that it can sell at a profit. Moreover, it will have to pay off more debt and interest over time, burdening its balance sheet and bottom line in coming years. Moody's Investors Service and Standard & Poor's cut their credit ratings on Ford's existing unsecured bonds.

Ford isn't alone in being forced to back its borrowing with hard assets. Earlier this month, General Motors Corp. pledged some equipment assets as collateral for a $1.5 billion loan and arranged earlier in the year for a $4.6 billion secured credit line, which, like a credit card, can be tapped when needed.

Ford's loan arrangement is the second-largest loan deal this year after HCA Inc., which recently obtained $15.6 billion in loans to help finance its leveraged buyout, according to Reuters Loan Pricing Corp.

Currently, Ford has around $23.6 billion in cash at the end of September and a $6.3 billion unsecured credit line, which will be replaced by the secured credit line.

Ford's move is timely as it taps into capital markets when investors are looking for high-yielding assets. A relatively robust economic outlook, low corporate default rates and a glut of capital has made investors more willing to take chances on new debt, even that of riskier companies.

Ford is "taking advantage of good conditions in the credit market," said John Novak, an analyst at Morningstar told the Wall Street Journal.

Ford's attempt to secure banks, hedge funds and other investors to provide significant financing even as it posts big losses could be a test of the credit market's willingness to tolerate risk. GM -- which is still finalizing its loan agreement -- will pay its holders an interest rate of 2.38 percentage points over a base rate known as London interbank offered rate, which is currently 5.37%. Ford is expected to launch its loan sale soon and will likely have to pay a rate slightly higher than GM's but lower than the current 9.7% yield on Ford's existing bonds.

Ford has $17.7 billion in debt outstanding. If it doesn't draw on its new secured credit line immediately, it will have close to $28 billion in debt at the end of the year. That compares with around $38 billion in cash and available funds it will have at year end. While Ford needs cash to remake its business, it also needs significant liquidity to fund its operations and pay suppliers for parts. The company has had losses of about $7 billion so far this year in its world-wide operations.

Ford shares were down 36 cents, or 4.2%, at $8.16 at 4 p.m. in composite trading on the New York Stock Exchange. Its bonds due in 2031 slipped 0.6 cent to 78.75 cents on the dollar.

J.P. Morgan analyst Himanshu Patel said in a note that the funding will lessen the likelihood of a bankruptcy filing in the near term.         

 

Source:  Wall Street Journal