Ford has $40 billion in total back-up facilities, with room to do another $5 billion in the unsecured commercial paper market and about $7 billion extra capacity in external ABS conduits. So it can increase short-term debt if need be.
None of these credit facilities has ratings triggers that would make access punitive and analysts believe Ford could do all its term financing in ABS for the next two years if necessary. And as Paul Griffith, credit analyst at Goldman Sachs, points out, relying on the ABS market is not necessarily problematic. “The aircraft industry finances itself through equipment financing so it’s conceivable that the auto industry could transition to a similar model of near complete reliance on the ABS markets.”
That will be fine as long as there is not some shock to the ABS market when Ford Credit and GMAC are still effectively locked out of the unsecured debt markets. If that occurred, the only solution would be gradually to run down receivables to pay off debts. At least investors can take comfort from the fact that Ford Credit says there is a ten-billion dollar cushion between its receivables and debt maturing over next 12 months, which means that even in the very worst situation, it would be self-liquidating.
Ford Credit seeks a new model
Ford Credit is clearly feeling the burden of its liabilities, though. It has retracted last year’s plan to grow managed receivables and is already looking at further ways to reduce its funding needs. It is gradually running down much of its lease and used-car financing. It is pursuing joint-venture opportunities to take more assets off its balance sheet. This year it has concluded its first such deal with Banco Bradesco in Brazil and CFO Bibiana Boerio says it is looking one-by-one at all the smaller markets it operates in where it has less competitive advantage in originating, servicing or funding loans. Maybe it should go further. “Why not joint venture Ford Credit in the US?” asks Griffith. “If you joint ventured the finance company with a major financial institution, the chances are it could jump right back up the ratings spectrum. Still, I’d be willing to bet you that any investment banker that talks to Ford or GM is talking to them about that.”
Of course the fewer cars their parents sell, the more their funding needs will go down anyway, although this is a double-edged sword. Both Ford and GM are spending more and more on marketing in a saturated US market where sales are declining month by month and where they are vastly less competitive than Asian rivals. Add to the mix their growing pension liabilities of $6.5 billion and $23 billion respectively, which is going to soak up much of their hard-won enhanced liquidity positions over the next few years. While the long-term shortfall does not have to be addressed at all until 2004, S&P for one has already said it views these companies’ unfunded pension liabilities as debt-like in nature, increasing their leverage. If there is a slump in consumer demand and US sales finally crumble next year, as many analysts predict, the situation will be worse.
These are only the beginning of the potential credit events that could have a further effect on spreads. “Over the next six to nine months, people are going to talk about the pension liabilities, the Fiat put for General Motors, about the disposal of Hughes Electronics and Ford’s restructuring plans,” says Christophe Boulanger, auto analyst at Dresdner. “I think you have a lot of topics here which can be used by hedge funds to make the market very volatile again.”
Another option would be a straight sale of Ford Credit. The disadvantage would be that Ford would be selling its most profitable revenue stream but this could probably pay off its pension shortfall and free up cash. Even if Ford Credit was only sold for book equity of about $15 billion, its pension plan is only underfunded by $6.5 billion. It would also remove the parent company’s heavy borrowing requirement and exposure to the debt capital markets.
Boerio discounts this idea and says a US joint venture is unlikely. “No we’re not considering any alternatives on that side.” She intriguingly adds, though: “We are clear on our advantage to Ford Motor Company in an owner loyalty perspective because of our connections with Ford customers though the lifetime of the contract and that’s something that’s important to us as we think of alternative business models.”
