Ford Motor Company
Mar 13th 2003 From The Economist print edition
Fresh talk that Ford might go bust
AN ANALYST who made his reputation by forecasting the downfall of both Enron and WorldCom claims that America's biggest corporate borrower has been saved from going bust only because its name is Ford. Sean Egan is the founder of a young credit-rating agency, Egan-Jones, which is seeking recognition from the Securities and Exchange Commission. Its website
trumpets its many triumphs.
To back up his headline-grabbing claim, Mr
Egan points to Ford's persistent losses, heavy
interest obligations, huge pension-fund
liabilities, excessive leverage, over-reliance on
securitised-debt sales, and more. His biggest
worry is that Ford must keep tapping the
market to roll over its debt. Last October, it
was shut out of the unsecured-debt market
when its spreads widened too far. Since then,
it has relied increasingly on debt secured
against customer repayments of car loans.
There are two problems with this strategy.
One, says Mr Egan, is that, sooner or later, the
established credit-rating agencies will not tolerate the way in which such secured issues
in effect debase the firm's unsecured debt. The
other is that conditions in the car business are
getting tougher by the week. Sales in America will fall by 12% this year, according to the latest forecast from Autopolis, an industry consultancy.
Used-car values are now falling and inventories of new cars are rising. Both trends make it harder to raise securitised loans. Ford's inventory levels in America were running almost 20% above normal at the end of February. In Europe, Ford is cutting back its leasing deals.
Ford has brushed off Mr Egan's claim, stressing that its pension liabilities, for example, are manageable. This week, Standard & Poor's (S&P) reaffirmed the company's triple-B credit rating, one notch above junk status. Yet, since the failures of Enron and WorldCom, S&P and Moody's, the two biggest rating agencies, have faced criticism for being too slow to spot looming corporate disasters. Mr Egan's view is that, even if investors do not share his view that bankruptcy is on the cards, they should at best price its bonds as junk. As if to drive home the gloomy message, Ford's share price, around $37 in 1999, fell this week to $6.60, its lowest for 15 years.
Bill Ford, chairman and chief executive of the family company since Jacques Nasser was hounded out 18 months ago, is trying to re-trim the Ford vessel in the midst of a storm. General Motors (GM) has wrested the initiative in the American market, gaining market share from Ford thanks to its generous sales incentives. Ford has had to follow suit, even though its higher costs mean it is in no fit state to do so. GM's boss, Rick Wagoner, admits that the February slump in sales showed that discounts were losing the power to stimulate sales, after a good run ever since they were introduced after the terrorist attacks of September 11th 2001. But he is determined to get them working again.
Some progress has been made at Ford. Although it lost $980m last year, this was down on the $5.4 billion deficit in 2001. After stripping out one-off charges and accounting changes, it made profits of $872m last year, compared with an operating loss of $782m in 2001. It is closing some American factories and straining to improve quality and its tired product range. Its European business has been reshaped and excess capacity slashed. The strategy of Ford's Premier Automotive Group (which comprises Land Rover, Aston Martin, Volvo and Jaguar) is being rewritten after overspending by former management.
Yet, ominously, just as Mr Egan and recent increases in spreads on Ford bonds over treasury bonds have set alarm-bells ringing, signs of tension at the top of the company's British-dominated management team have emerged. Amid much embarrassment, Sir Nick Scheele, Ford's chief operating officer and number two to Mr Ford, this week reversed a decision to place all of the firm's advertising in the hands of WPP (a British-based agency group that already handles 80% of it). A leak to the Detroit News said the firm was reviewing whether he had breached Ford's purchasing procedures. It is hard enough to steady the ship in a storm; when people start to attack the judgment of the first mate, might it not be time for the big American banks to launch a lifeboat?
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