DEARBORN, Mich. – Ford Motor Co. took another step to stay cost-competitive with government-financed automakers General Motors and Chrysler when it offered to exchange up to 40 percent of its debt for cash and stock.
The company and its financial arm are putting up $2.2 billion in cash to entice holders of $10.4 billion in convertible notes, other unsecured debt and secured term debt to take the offer. The company said Wednesday that reducing the debt will cut the amount it pays in interest and put it in better position to compete with General Motors Corp. and Chrysler LLC.
"This is all part of a restructuring plan to make the company healthier in the end," said Ford spokesman Mark Truby.
GM and Chrysler also are trying to swap debt for equity as a requirement of the $17.4 billion in government loans they have received.
Ford, which also is trying to restructure amid a severe automotive sales downturn, said Wednesday that it still does not intend to seek federal aid.
The company said it will offer a cash premium to get debtholders to exchange up to $4.9 billion in convertible notes issued in 2006. Every $1,000 in notes is already convertible into about 108.7 shares of common stock, but Ford will offer an additional $80 in cash to sweeten the deal.
In addition, the company will use up to $1.3 billion in cash from Ford Motor Credit Co. to buy back as much as $4.2 billion in unsecured, nonconvertible debt. The company said it would purchase those bonds for 30 cents on the dollar, when they are now trading at around 20 cents because of deep worry among investors about the automaker's health.
The offers expire at 9 a.m. EDT on April 3. However, the offer of 30 cents on the dollar for the nonconvertible debt will drop to 27 cents after March 19.
Ford also said it will pay $500 million in cash for up to $1.3 billion in senior secured term loans through an auction process. That offer expires March 26.
Ford also said it will defer dividend payments on its 6.5 percent preferred securities starting in April, which will help the company conserve cash at a time when U.S. auto sales are at their lowest level in more than 27 years.
Kip Penniman, credit analyst for KDP Investment Advisors, estimated Ford could save up to $600 million in interest expense if it got debtholders to take the terms outlined. But he said only an increase in consumer demand for automobiles would save the struggling company.
Penniman said the offers may only be a starting step in opening discussions with bondholders, who might be looking for more cash.
"I think it's just the beginning of negotiations," he said. "The efforts are beneficial for the company, but there's still a question of whether it's enough to keep them out of Chapter 11."
The Dearborn-based automaker said it is trying to match the debt restructuring requirements imposed on Chrysler and GM under the terms of their government loans. GM's terms, for instance, set a target for the company to swap two-thirds of its unsecured debt for equity.
Ford had $25.8 billion in debt at the end of 2008.
As debt is converted to shares, current stockholders will hold a smaller piece of the company's equity. The 500 million shares that are part of Ford's conversion offer will make a large addition to the approximately 2.3 billion shares of common stock already outstanding.
Truby said those shares were part of the original debt offering, so there shouldn't be much dilution, but Fitch Ratings analyst Mark Oline said the additional shares would certainly cut the value of existing ones.
Before Ford announced its offers, its shares closed up 6 cents to $1.87. The shares fell 17 cents, or 9.1 percent, to $1.70 in after-hours trading.
Still, Oline said the debt swap is a "mild positive" because it allows the company to save on interest payments. He said he expects many bondholders to take the offer because a large number of Ford bonds have been sold to short-term investors who were gambling on a small return over 20 cents on the dollar.
"They could see an opportunity to make a very profitable short-term trade, depending on where they purchased those bonds," Oline said.
Ford reached a deal last month with the United Auto Workers to eliminate some benefits and make some payments to a retiree health care trust fund in the form of stock instead of cash. As part of the agreement, Ford promised to make to restructure its debt and get concessions from other stakeholders such as dealers, suppliers and executives.
Ford has been moving faster than its competitors to strike such deals even though it isn't required to trade debt for equity and obtain concessions like GM and Chrysler. Those companies are racing to get their restructuring efforts in place by a March 31 government deadline.
But Ford isn't immune from the troubles that brought GM and Chrysler to the brink of bankruptcy late last year and prompted Toyota Motor Corp. and Honda Motor Co. to ask the Japanese government for help this week.
Ford's net loss of $14.6 billion last year was the worst annual loss in the company's 105-year history, and the company's U.S. sales fell 48 percent last month as people fearful of losing their jobs and watching the value of their investments plunge steered clear of showrooms.