Corporate Finance : Ford Has Better Idea: Convertible Bonds


Taking advantage of strong demand for debt securities that can be exchanged for shares, Ford Motor sold $4.5 billion of convertible bonds in December, which was some 50% more than it originally intended to offer. The issue was one of the biggest convertible bond sales of 2006, second only to a $5 billion two-part offering last February by Amgen, a California-based biotechnology company.

Convertible securities pay a fixed interest rate, similar to bonds, but they can be converted to stock under certain conditions. By issuing convertibles, Ford was able to reduce its borrowing costs significantly from what it would have paid for straight debt. Strong demand for the securities enabled the troubled automaker to sell the bonds with a 4.25% coupon, instead of the 4.75%-to-5.25% range expected earlier.

The joint bookrunners on the sale were Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley. As of December 7, 2006, Citigroup was the top bookrunner for convertible debt issues in the year to date, with a market share of 17.1% from 28 deals, followed by Merrill Lynch, with a 12.6% share from 34 deals, according to Dealogic.

US convertible debt volume totaled $59.9 billion from 133 deals in the year to date as of December 7, an increase of 51% from $39.7 billion in the full year 2005, Dealogic said.

Fords convertible bonds rose sharply in price in the first few days after they were issued. The securities appealed to investors betting on a turnaround at the automaker because the bonds, which cannot be redeemed by Ford before seven years, provide interest income as well as the potential to benefit from a rise in the price of the companys common shares.

Together with a $7 billion loan and an $11.5 billion line of credit, the proceeds of the convertible bonds will enable Ford to go forward with a major restructuring that will include the elimination of thousands of jobs and the closing of nine plants. In August 2006 Dearborn, Michigan-based Ford put its high-end British sports car line Aston Martin, featured in many James Bond movies, up for sale. Aston Martin, which has been posting large losses, reportedly could be sold for more than $1.2 billion.

Ford, which has been losing market share in the United States for 11 straight years, announced in early December that about half of its 75,000 US hourly workers had agreed to take offers to leave the company. Ford also plans to eliminate 14,000 salaried positions through buyouts or early-retirement packages. The company lost $7 billion in the first nine months of 2006 and says it expects to earn a profit in North America in 2009 after cutting costs.

Ford said in a statement that it would use its new financing package, totaling approximately $23 billion, in order to address near- and medium-term negative operating-related cash flow, to fund its restructuring and to provide added liquidity to protect against a recession or other unanticipated events. The bulk of the newly announced funding will be secured by nearly all of Fords US automotive assets and mark the first time the company has pledged assets for loans.


Gordon Platt