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        home > news > Automakers > Ford Beefs Up Liquidity with $2B Convertible Notes Offering

        Ford Beefs Up Liquidity with $2B Convertible Notes Offering

        Three product launches and tough 2020 sales result in big cash drain.

        Jim Stickford , Contributing Editor
        March 18, 2021
        Ford Bronco family
        Ford launched three new products, including the Bronco family, last year.

        Ford Motor announced it is offering as much as $2.3 billion in convertible notes to raise money for, among other things, paying for general corporate purposes, including the potential repayment of debt.

        Given all of the challenges Ford and other automakers face in 2020, adding a little extra liquidity isn’t unheard of. However, Kristin Dziczek, vice president of the Center for Automotive Research in Ann Arbor, Michigan said that Ford is in an unusual financial predicament.

        “At the start of the pandemic a year ago, people all over the auto industry had visions of the troubles of 2009 happening again,” Dziczek said. “So everyone started saving money for the future. But in 2020 Ford had three major vehicle launches — the new F-150, the new Bronco and the Mach-E. Launching a new model is costly and launching three in one year is a huge cash drain. Which is the situation Ford found itself in during 2020.”

        Ford facing a big cash draw

        But Ford still needs money to make the huge investments in EV and AV technology, Dziczek said. Now is not the time to slow down developing new tech due to money flow problems. So it makes sense that the company would do something like raise $2 billion via the convertible notes. This allows the company to raise capital now and control when they pay back the investors over time.

        2021 Ford F-150 Raptor jumping
        The automaker also rolled out a new F-150 in 2020, which requires a big cash commitment.

        “Convertible bonds are a hybrid model to raise money,” Dziczek said. “But the bottom line is that Ford is going to the market to raise $2 billion at a time when things are very unpredictable.”

        The company did take a variety of actions during the pandemic to conserve cash and build liquidity. In the early stages of the pandemic last March, the automaker suspended its dividend and drew $15.4 billion from its credit lines to ensure it had the cash needed to weather the tough times.

        It followed that by issuing an additional $8 billion in new securities, pushing the cash on its balance sheet at that point north of $40 billion. Last July, it received approval to defer some quarterly payments due on its $5.9 billion U.S. Energy Department retooling loan from 2009.

        The loan, which had a remaining balance of $1.26 billion at the time, was modified the previous month to reduce quarterly principal payments from $148 million to $37 million. The automaker noted it will repay the loan on time by June 2022.

        Flexibility for the automaker

        The notes can be redeemed by the automaker for cash or simply be converted into stock. This gives the company some wiggle room based on its performance at the time.

        2021 Mustang Mach-E
        The 2021 Mustang Mach-E was the third product Ford introduced last year.

        “Companies do this kind of thing for a number of reasons,” Jeffrey Briggs, a venture capitalist said. “One might be that they don’t want to issue stock but by selling convertible notes the company can take in funds now and convert these notes to equity later. I’ve heard of companies like Ford doing this in the past, so this is a financial move that definitely happens.”

        The move allows the company to determine if it would be better to pay cash or, if the stock price dictates, simply let it roll over to equity in the company.

        Details about the notes

        The notes are a private placement being offered to “qualified” investors, in this case banks, pensions funds or other large institutional investors until March 19. However, the company’s providing buyers a 13-day option to purchase an additional $300 million in notes.

        With a 0% interest rate, the notes come due March 15, 2026, but the company can redeem them as early as March 20, 2024 for cash. However, there are some conditions that apply, according to the prospectus.

        Ford and partner Argo AI are still investing heavily in autonomous vehicle development.

        “(I)f the last reported sale price of Ford’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which Ford provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date.”

        The initial conversion rate for the notes is 57.1886 shares of Ford’s common stock per $1,000 principal amount of notes, the company noted, which equates to a conversion price of approximately $17.49 per share.

        The last reported sale price of the Ford’s common stock on March 16, 2021, when Ford initially revealed the offering, was $12.49 per share. Full details were disclosed March 17, and the stock closed at $12.69 a share, up 20 cents from the previous day.

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