Ford to pay nearly 10% on new debt to cover losses


Ford Motor Co Updates

Ford is expected to pay interest rates of nearly 10% to access the bond market, as the U.S. automaker raises the cash it needs to weather a global economic shutdown due to the coronavirus pandemic.

The Dearborn, Mich.-Based company launched an $ 8 billion fundraiser on Friday, after telling investors it expects to post a $ 2 billion loss in the first quarter on a figure of $ 34 billion business.

With most Ford factories around the world closed and consumers in many markets unable to make it to car dealerships, results reflect a sharp contraction. In the first quarter of 2019, the company reported net profit of $ 1.1 billion on $ 40 billion in revenue.

Ford, which had its senior credit rating stripped last month, said Friday morning that it was prepared to pay yields of up to 11% on the new debt.

But the supply drew $ 20 billion in orders in the first two hours, according to two investors, and strong demand saw it squeeze returns significantly from early indications.

Ford is expected to pay a 9.625% return on $ 1 billion in 10-year debt, according to people familiar with the pricing. It also issues $ 3.5 billion in five-year bonds at 9% yield and $ 3.5 billion in three-year finance debt at 8.5% yield.

Ford was able to raise five-year bonds at an interest rate of just 3.5% in February, meaning its financing costs more than doubled in a matter of months. The last time the automaker had to pay such high rates to get into debt was at the height of the financial crisis in 2008, when it paid 18% to enter the market.

Ford carries an undesirable rating from Moody’s and S&P, but its bonds are still eligible for the Federal Reserve’s corporate bond purchase program. The US central bank said it would buy investment grade corporate bonds on March 22, before the automaker lost its valuable senior credit rating.

John McClain, portfolio manager at Diamond Hill Capital Management, said the sale of debt looked “attractive” given that the Fed can buy the three- and five-year bonds sold, and a longer 10-year bond. that Ford was also proposing would perform well if the company weathered the global economic crisis.

“While there are certainly known risks here, investors are adequately compensated,” Mr. McClain said.

Ford was already struggling to realize the benefits of a global restructuring that began in 2018 before the pandemic hit, and had disappointed investors and analysts with previous quarterly results.

Meeting consensus earnings expectations doesn’t matter anymore, however, according to Morningstar equity analyst David Whiston. “At this point, the only thing that matters is survival,” he wrote in a note to clients.

The only Ford factories that produce and sell cars to dealerships right now are in its joint ventures in China, where the virus first took hold and the economy is now reopening.

The automaker sold 516,330 cars, trucks and sport utility vehicles in North America between January and March, a drop of nearly 13% from the previous year. In China, the number of vehicles sold fell 35% to 88,770 vehicles, but sales started to recover in March.

The company plans to restart its manufacturing plants and supply network in the second quarter. Ford has $ 30 billion in cash on its balance sheet, which CFO Tim Stone says is “enough.” . . to get us through at least the end of the third quarter without any additional vehicle production, wholesaling or fundraising ”.

Mr Whiston estimated that prior to the bond issuance, the company had enough cash to last about six months. Ford raised more than $ 15 billion in cash last month using credit facilities from banks.

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