Ford to pay over 10% on new debt to plug losses

Ford is set to pay interest rates of more than 10 per cent to access the bond market, as the US carmaker looks to raise the cash it needs to ride out a global economic shutdown due to the coronavirus pandemic.

The Dearborn, Michigan-based company launched a new fundraising on Friday, after telling investors it expects to post a $2bn loss in the first quarter on $34bn in revenue.

With most of Ford’s plants around the world shuttered and consumers in many markets unable to get to car dealerships, the results reflect a sharp contraction. In the first quarter of 2019, the company reported net income of $1.1bn on $40bn in revenue.

Ford, which was stripped of its investment-grade credit rating last month, is looking to raise several billion dollars in the bond market and indicated early on Friday that it could pay yields as high as 11 per cent on the new debt.

Ford was able to raise five-year bonds at an interest rate of just 3.5 per cent in February, meaning its funding costs are set to roughly triple in a matter of months. The last time carmaker had to pay such onerous rates to raise debt was in the depths of the financial crisis in 2008, when it paid 18 per cent to access the market.

While the company has not yet announced exactly how much it is planning to raise, the deal had already drawn $20bn of orders two hours after announcement, according to two investors.

Ford now carries a junk-rating from major agencies Moody’s and S&P, but its bonds are still eligible for the Federal Reserve’s corporate bond buying scheme. The US central bank announced that it will buy corporate bonds that were rated investment-grade on March 22, before the carmaker lost its prized upper-tier credit rating.

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

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

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

Meeting consensus earnings expectations no longer matters, 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 are producing and selling cars to dealers right now are at 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 decrease of nearly 13 per cent from a year earlier. In China, the number of vehicles sold dropped 35 per cent to 88,770 vehicles, but sales began to recover in March. 

The company plans to restart its manufacturing plants and supply network sometime in the second quarter. Ford has $30bn in cash on its balance sheet, which chief financial officer Tim Stone said is “sufficient . . . to get us through at least the end of the third quarter with no incremental vehicle production and wholesales or financing actions”.

Mr Whiston estimated that, prior to the bond issue, the company had enough cash to last about six months. Ford raised more than $15bn of cash last month by drawing down on credit facilities with banks.