Ford in Trouble? From NY Times

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    Ford Motor's Legs Are Wobbly Under Finance Unit's Debt Load
    By GRETCHEN MORGENSON


    hat made shares of the Ford Motor Company plummet yesterday for the second consecutive trading session? The answer, investors and credit analysts say, was nothing and everything.

    Nothing, because there was no bad news about car sales in general or Ford's operations in particular to prompt yesterday's 7.7 percent decline in the stock. Everything, because investors seem to be awakening to a host of weaknesses in Ford's financial position.

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    Ford, mostly through its Ford Motor Credit unit, carries a staggering debt load. It faces lingering questions from investors about how it presents its cash position and concerns about its ability to finance long-term pension and health care obligations to workers. Add to this the perception that the economy may be weakening, and it is not surprising that Ford securities have been punished in recent days.

    Still, the viciousness of this week's decline took some investors by surprise. Ford's shares traded as low as $6.90 yesterday, but rallied a bit to close at $7.15, their lowest level in 10 years. They are down 16 percent on the week.

    The move in Ford stock yesterday seemed to reflect a change of heart among stock analysts who had been, until fairly recently, sanguine about the automaker's future. Rather than focus strictly on Ford's operations, equity analysts now seem to be homing in on the company's balance sheet as well. And they do not like what they see.

    Salomon Smith Barney removed Ford from its recommended list of stocks yesterday, citing the precipitous decline in the shares and liquidity concerns.

    The more that investors focus on company balance sheets, the more anxious they seem to become about heavy corporate debt or a company's dependence on capital markets. Investors seem to have concluded that a company's future can depend less on its operations than on its ability to finance those operations.

    Unfortunately, the capital markets have shut their doors to many companies. According to Moody's Investors Service, $6 billion was raised in corporate speculative-grade bonds in the third quarter, almost 18 percent less than the amount raised in the comparable period last year and far below the $29 billion generated by issuers in each of the first two quarters of 2002.

    Stock analysts' fresh concern over Ford's balance sheet is old news to some independent credit analysts who have expressed worries about Ford's financial position for months. While the major debt rating agencies, Moody's and Standard & Poor's, still rate Ford's debt investment grade, analysts at Egan-Jones Ratings, an independent credit analysis firm in Wynnewood, Pa., downgraded Ford to junk bond status in January. And Carol Levenson, high-grade bond analyst at Gimme Credit, an independent research firm in Chicago, puts Ford among the bottom 10 corporate debt issuers for its deteriorating credit quality. She advises her clients to steer clear of Ford debt.

    An increasingly negative view on Ford among bond investors is problematic to the company and its financing arm, Ford Motor Credit, which is the largest issuer of corporate debt in the nation. While Ford's cash position improved in the most recent quarter, the company and its financing arm had long-term debt of approximately $170 billion.

    Servicing this debt is becoming a bigger burden for Ford. According to Egan-Jones, in December 2000, Ford's operating earnings were just about double its interest expense. Recently, these earnings came in at less than half the expense. And shareholders' equity at the company, its net worth, has fallen from $19 billion at the end of 2000 to $7.8 billion in the most recent quarter.

    When bond investors sour on a company's prospects, higher borrowing rates are a result. Though rising costs for financing are never a plus, Ford will especially suffer from higher costs because of its zero percent financing deals to car buyers.

    "The company has barely been making enough money to cover its interest expense over the last year," Mr. Egan said. "There's also the issue of unfunded pension liabilities. Ford is right on the edge of the precipice; if they have a 50 or 100 basis point increase in funding costs, things break down very quickly." Ford management has said that its financing needs in 2003 could be $22 billion to $32 billion.

    If the company had to come to market now it would be forced to pay up. In just the last two weeks, yields on one Ford Motor Credit issue have risen 1.25 percentage points, from 8 percent to 9.25 percent.

    It is a measure of investor anxiety regarding Ford debt that the Ford Credit issue maturing in 2011 and paying a coupon of 7.25 percent, began the day at a yield of about five percentage points above a Treasury security coming due at the same time. By the end of trading yesterday, the yield on that issue had grown to six percentage points more than the Treasury's.

    "Ford has become a lightning rod for all the specters haunting high-grade bond investors these days," Ms. Levenson said. Last month, for example, an analyst at Goldman, Sachs wrote a report saying that Ford overstated its cash position by $10 billion because of the way it accounted for its no-interest loans. In an unusual move, Ford challenged the analyst's report in a filing with the Securities and Exchange Commission, stating that its accounting was proper and that the effect of the treatment was "less than half" of the $10 billion cited by Goldman. Nevertheless, questions of accounting transparency hang over the company, Ms. Levenson said.

    The assumptions that Ford makes on expected profit from pension investments are another concern. The company is estimating 10 percent annual returns, Mr. Egan said, which he called far too optimistic. At the same time, he said unfinanced pension liabilities at the company run $5 billion to $10 billion.

    "There has been a shift in the bond market within the last few days," Mr. Egan said. "People are more concerned about the company getting into difficulty."

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    Cerberus

 
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