Wednesday, November 29, 2006

Built Ford Tough?

Let's talk about some sobering realities in regards to Ford, which was downgraded by Moody's to Caa1 on Monday after borrowing a fresh $18 billion.

1) According to Moody's, since 1983, 21% of issuers rated in the Caa range are in default within one year. 43% of these issues are in default in 3 years, and 79% of Caa issuers are in default in 10-years.

2) Ford has pledged every damn asset they have, including their equity in Ford Motor Credit and Volvo, to secure the new loans. In effect, these assets have been taken away as security for Ford bond holders and given to new creditors.

3) This means that, de facto, Ford bond holders have become subordinate to creditors, and are unlikely to enjoy much recovery.

Now here is the good news. Ford has substantial amounts of free (e.g. non-pledged) cash, between $25 billion and $38 billion depending on who you ask. Fitch says they think cash burn will be around $8 billion next year. So at that rate, they should last another 3 years or so. But then again, if auto sales are weakening, the $8 billion figure may turn out to be conservative.

I talked to a corporate trader today who is heavy into trading Ford bonds. They've now hocked everything they can, he told me. If their current restructuring plan doesn't work, and work quickly, Ford is going to implode.

As Julius Caesar once said, the die is cast.

3 comments:

HFT said...

Do you think we can still short the Ford common vs. debt ?

and , off topic ,

What are your thoughts on Non-inversion notes , seeing the swap curve "inverting " ?

very strange and rare behavior , thanks in advance

Tom G. said...

I'm in NY today on a pitch, so I'll make it quick. Shorting equity vs. debt is a trade I like, particularly FMCC. Its risky as hell, so this is not a trade for most people. So this is REALLY AND TRULY NOT ADVICE!!!!!!!!!! But you are getting paid a nice coupon which would alleviate the pain if the equity turns around. And if F goes bankrupt, then your bonds are worth more than the equity. So it makes sense. NOT ADVICE FOR THE LOVE OF PETE... NOT ADVICE.

ALSO NOT ADVICE!!!!!!!!!!!!!

I love the non-inversion notes. Maybe I'll post about it soon.

NOT ADVICE!!!!!!!!!!!!!!!!

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