March 5 (Bloomberg) -- Ford Motor Co.bonds and loans rose and the cost to protect against a default declined after the U.S. automaker said it plans to reduce debt by as much as $10.4 billion through an exchange offer.
Ford late yesterday offered to pay bondholders $1.3 billion for a portion of their $8.9 billion in senior unsecureddebt, a 55 percent premium for some issues. The only U.S. automaker not surviving on government cash also said it would pay a premium of as much as 52 percent to buy $500 million of a $6.9 billion loan, and offer a combination of cash and stock to induce holders of $4.9 billion in convertible bonds to trade for shares.
The Dearborn, Michigan-based company’s 7.45 percent bonds due 2031 jumped more than 8 cents to 28 cents as of 11:10 a.m. in New York. Ford may still need to boost the offer to convince investors to sell, said Kip Penniman Jr., an analyst at fixed- income research firm KDP Investment Advisors Inc. He said the loan is worth “substantially more” than the 38 to 47 cents Ford offered.
“It’s the first salvo in negotiations with the lending group and senior unsecured bondholders,” Penniman, who is based in Montpelier, Vermont, said in a telephone interview. “We’re going to advise the bondholders not to take the offer.”
Automakers are struggling to meet debt payments amid a global recession. U.S. sales in February slid to the lowest rate since December 1981, led by a 53 percent plunge for Detroit-based General Motors Corp., as the slumping economy scared off prospective buyers.
Plunging Sales
Sales tumbled 48 percent for Ford, 44 percent for Chrysler, 40 percent for Toyota Motor Corp., 38 percent for Honda Motor Co. and 37 percent for Nissan Motor Co.
“We have no plans to use taxpayer money,” Ford Chief Executive Officer Alan Mulally said in an interview at a Wall Street Journal-sponsored conference in Goleta, California. “Our plan is on track. We acquired the funding that we needed two-and- a-half years ago, and we think that we’re still on track to continue the transformation and not use government money.”
Ford had $25.8 billion of debt at the end of 2008 after borrowing $23.4 billion in late 2006, a move that gave it more cash than GM or Chrysler LLC, both of which received U.S. loans late last year. To obtain the financing, Ford had to put up all major assets, such as its headquarters and blue oval logo, as collateral.
‘Debt Equals Bad’
“Anything that converts debt to equity is very good,” said Shelly Lombard, an analyst in Montclair, New Jersey, at bond research firm Gimme Credit LLC. “In this environment debt equals bad and less debt equals good.”
Ford hired Goldman Sachs Group Inc., Blackstone Group LP, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co. to help manage the notes tender offer, according to the filing. Blackstone, Citigroup, Goldman and JPMorgan are handling the loan auction.
Companies are increasingly buying back bonds at discounted prices because the U.S. economic stimulus package included provisions to defer so-called cancellation of debt income until 2014, according to Louise Purtle, a strategist at New York-based CreditSights Inc. After Ford’s announcement, Las Vegas-based casino company Harrah’s Entertainment Inc. offered to exchange $2.8 billion in bonds to reduce debt and extend maturities.
‘A Meaningful Difference’
“It will make a meaningful difference to distressed companies considering debt restructurings that would otherwise have incurred significant tax liabilities,” Purtle, who is based in New York, wrote on Feb. 17.
In addition to offering as little as 30 cents on the dollar for the bonds, Ford would also spend $500 million buying back term loans due in 2013 through a “Dutch” auction.
The company will accept bids in a range of 38 cents to 47 cents on the dollar from investors in the $6.9 billion loan who want to sell their holdings back to the company. The loan was being quoted at 31 cents on the dollar before the offer, according to London-based pricing service Markit Group Ltd.
Investors may press for a range of 50 cents to 60 cents on the dollar, KDP’s Penniman said.
Ford said the debt restructuring may allow it to use stock for as much as 50 percent of its cash-payment obligations to a union-run trust known as a voluntary employee beneficiary association, or VEBA. Ford and the United Auto Workers agreed in 2007 that such a trust would assume responsibility for retiree health care starting in 2010.
“Ford’s debt restructuring, if successful, would reduce debt and cash interest expense and, in our view, would lead to a modest decrease in the risk of a near-term default,” Standard & Poor’s said in a report.
Bondholder Protection
Traders of credit-default swaps are demanding about 79.25 percent upfront, in addition to 5 percent annually, to protect against a Ford default for five years, according to CMA DataVision. That means it would cost $7.9 million initially and $500,000 annually to protect $10 million of Ford debt to 2014. Traders were demanding 84 percent upfront yesterday.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities, or the cash equivalent, should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
“If the deal gets done, there should be some upside for the rest of the bonds,” Gimme Credit’s Lombard said.
To contact the reporter on this story: Bryan Keogh in New York atbkeogh4@bloomberg.net
