Ford Motor Company (NYSE:F) today is reducing its debt by more than $4 billion by retiring debt owed to the UAW Retiree Medical Benefits Trust ahead of schedule. The company said it is taking the action to strengthen its balance sheet.
Analysts have noted that although Ford escaped bankruptcy during the Global Great Recession, it still has a relatively large amount of debt.
Moreover, Ford is increasingly returning to fleet sales in the U.S. this year to keep momentum going, and it is losing ground in Europe to stronger French competitors, notably Renault, due to pricing and quality issues. The stock has been under selling pressure recently and is currently trading on the $10 range. (See European Auto Market Tanks in May)
Nonetheless, Ford says it will post a profit and positive automotive operating-related cash flow this year, which means the stock price could be caught in forces beyond Ford’s control.
Ford is making scheduled payments in cash totaling about $860 million on Notes A and B held by the UAW Retiree Medical Benefits Trust – including about $250 million due under Note A, and $610 million due under Note B. Ford had the option to pay Note B with cash or Ford stock but agreed to pay with cash.
In addition, Ford and its subsidiary, Ford Motor Credit Company, are paying a combined $2.9 billion to retire the remaining obligation on Note A at an agreed upon discount of 2%.
Separately, Ford is making a $255 million cash payment to bring current previously deferred quarterly distributions on the 6.50% Cumulative Trust Preferred Securities of Ford Motor Company Capital Trust II.
With today’s actions and an April payment of $3 billion on its 2013 revolving credit facility, Ford will have reduced its debt by more than $7 billion in the second quarter. The second quarter debt reduction will save Ford more than $470 million in annual interest expense.
“We expect to continue to improve our balance sheet as we deliver on our plan,” said Ford President and CEO Alan Mulally.
“Importantly, our business results make it possible to take these actions while still accelerating the investments we are making in our business to serve our customers with the very best cars and trucks,” Mulally claimed.
The second quarter debt reductions are in addition to a series of actions Ford has taken since early 2009 to improve its balance sheet. These include completing transactions in spring 2009 that reduced Ford’s Automotive debt obligations by $10.1 billion and raising more than $5.7 billion since the second quarter of 2009 through several equity and equity-linked offerings.
The VEBA Trust Note Obligations
Pursuant to a March 2008 settlement agreement, the UAW Retiree Medical Benefits Trust was created to assume responsibility for providing retiree health care benefits to eligible Ford-UAW employees and their dependants, the cost of which would be funded with assets contributed by Ford.
The settlement was amended in March 2009 to create Notes A and B, which smoothed Ford’s payment obligations and gave Ford the option to use Ford stock to make payments under Note B. On Dec. 31, 2009, Ford completed the transfer of assets, including Notes A and B, to the UAW Retiree Medical Benefits Trust, and the trust assumed the retiree health care liabilities.
June 2010 Agreement
The payments made today result from an agreement last week between Ford and the UAW Retiree Medical Benefits Trust that includes:
- Ford making the scheduled payments on Notes A and B in cash totaling about $860 million. Ford and Ford Credit purchasing for cash the remaining $2.96 billion outstanding principal amount of Note A at a price of 98 percent, or $2.9 billion, of which $1.6 billion is being paid by Ford and $1.3 billion is being paid by Ford Credit. Ford Credit intends to deliver to Ford the portion of Note A that it is purchasing from the UAW Retiree Medical Benefits Trust to satisfy existing intercompany tax liabilities it owes to Ford.
- Subject to regulatory approval, the UAW Retiree Medical Benefits Trust is providing Ford a three-year right beginning in July 2010 whereby Ford has the flexibility to pre-pay for cash, periodically during each year, all or a portion of the remaining $3.6 billion outstanding
- principal amount of Note B at a 5 percent discount for purchases made prior to 2012 and at a 4 percent discount for purchases made after 2011. Previously, Ford could pre-pay Note B once a year at par.
Ford also announced today that it is paying in cash to the trustee all accrued distributions previously deferred totaling $255 million on the Trust Preferred Securities, and that it intends to resume making quarterly distribution payments starting with the payment due on July 15, 2010.
The accrued distributions will be paid by the trustee on July 15, 2010, to the holders of record of the Trust Preferred Securities on June 30, 2010. Distributions on the Trust Preferred Securities had been deferred in accordance with their terms since April 15, 2009.
Ford said its liquidity and ability to generate positive cash flow are sufficient to warrant reinstatement of the distributions on the Trust Preferred Securities.