Days after revealing it plans to go to the debt markets to add more cash to its reserves, Ford Motor Co. raised $8 billion by rolling out a three-part issue of new securities.
There were concerns about what it would cost the automaker to raise money this way after Moody’s and Standard & Poor’s both lowered Ford’s credit ratings in recent weeks. However, in a time where leaving cash in what amounts to savings accounts earns the holders basically no interest, Ford’s new offering became very appealing.
Investors will earn between 8.5% and 9.625% on the new securities, and there was enough demand for $40 billion, Reuters reported. The willingness of investors to sign on was viewed as a good sign by some analysts.
(Ford adding unknown amount of debt to bolster cash reserves.)
“Today’s deal is a good sign of the growing confidence around the improving market backdrop with respect to liquidity as well as more promising views around the economic outlook,” said Dan Mead, head of investment grade syndicate at Bank of America Securities, which was one of the lead banks on the Ford deal, Reuters reported.
Last week, the automaker warned it could lose as much as $2 billion during the first quarter due to the coronavirus pandemic that has forced the shutdown of the automaker’s plants in North America, Europe and numerous other global markets.
That’s substantially worse than the previous guidance from Detroit’s second-largest automaker, Ford barely a week before saying it expected a pretax loss of around $600 million, with global revenues off 16% for the January-March quarter.
Despite the hit from the disease, which has subjected the vast majority of Americans to shelter-in-place orders, Ford issued a statement by CFO Tim Stone saying that, “Ford believes (its) present cash balance is sufficient through at least the end of the third quarter, even without resuming additional production or further financing actions.”
The pandemihas hit Ford – and the rest of the auto industry – hard, but the question is how much longer automakers will feel its impact. Signs of a deadly outbreak first appeared in China late in 2019 and, by February Chinese leaders began ordering lockdowns in Wuhan – where coronavirus first appeared – and then other regions of the country. Factories shut down and sales in the world’s largest automotive market came to a virtual halt.
As COVID-19, the disease caused by the coronavirus spread, lockdowns rapidly expanded, as well – first to Europe and then to the U.S. In Ford’s home market, overall March new vehicles sales tumbled by 39% and, by the middle of the month the entire North American automotive production network ground to a halt.
As a result, Ford said, it now expects total revenues for the first quarter to slip about 15.7% through the end of March, down 15.7% from the $40.3 billion it took in during the first quarter of 2019.
(Ford expects to lost $600 million during first quarter.)
The question is what will happen in the second quarter. J.D. Power has indicated the U.S. market has remained stronger than anticipated. But new vehicle demand was still off about 55% for the first half of April and not expected to see any real rebound until at least June, according to Power analyst Tyson Jominy.
Production, meanwhile, remains on hold in North America until at least early May and, despite Pres. Donald Trump’s push to get the economy rolling again, there is a strong pushback from many governors and medical experts that could lead to further delays. Since automakers generate their revenue when vehicles are delivered to dealers, the shutdown of production has hammered the industry.
On the plus side, Europe is beginning to open back up. Hyundai started limited production last week and more manufacturers will be following up this week and next. Much of the Chinese auto industry also is back up and running, though sales in both those regions aren’t expected to be back to normal anytime soon, according to industry analysts.
Despite the impact of a crisis that has seen U.S. new vehicle sales to levels even lower than during the Great Recession, Ford contends it is in a much better place than it was a decade ago, the automaker reporting it had $30 billion in cash reserves as of April 9. About half of that came from two rounds of borrowing, however.
Ford’s crosstown rivals, Fiat Chrysler and General Motors, have also been trying to assure analysts and investors that they can weather this storm after both having gone into bankruptcy during the last recession. GM, for one, issued an advisory that said it is working “aggressively to strengthen (its) liquidity.”
But there is little doubt that automakers around the world will be hard hit during at least the first half of the year.
“The (original) full year outlook for 2020 … can no longer be achieved,” VW said in a statement, pointing to a “decline in customer demand and supplier bottlenecks (which have) led to production stops.”
(Ford COO Farley shuffles executives to accelerate improvement.)
Shares of Ford and GM were both off slightly in Monday morning trading.
Michael Strong contributed to this story.
