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How Ford Restructured Without Federal Help

MAY 11, 2009

How Ford Restructured Without Federal Help
The company is now at a disadvantage to its less prudent rivals.





Dearborn, Mich.

You're forgiven if you think the Chrysler Bailout is a hot new car that competes with another model called the GM Rescue. Then there is the Ford Forego, brought to us by the only Detroit auto maker to forego government assistance, at least so far.

That's good for the taxpayers and for Ford, right? Well, maybe not. While General Motors and Chrysler will emerge from the government restructuring wringer with significantly reduced debt, Ford will still likely be obliged to repay its lenders. This could put Ford at a competitive disadvantage -- an unfortunate irony for the one Detroit car company that has gotten the decisions mostly right in the last few years.

Ford also might emerge from the current crisis as the largest American auto maker for the first time in more than 80 years. GM had 18.6% of the market in the first quarter of this year to Ford's 14.7%. But GM's lead could be wiped out when the company sheds four or five brands to satisfy President Barack Obama's automotive task force.

True, "Largest American Car Company" might by a pyrrhic title these days. Ford just posted a $1.4 billion loss for the first quarter of 2009, after cumulative losses of $30 billion for the prior three years. During those same three years, however, Ford revamped its product offerings to the point where it soon will have a coherent lineup for the first time in a decade. That's a big turnabout for a company whose auto lineup was so unappealing a few years ago that it almost abandoned cars entirely to focus on SUVs and trucks.

In Ford's last big comeback, its midsize sedan, the Taurus, popularized aerodynamic styling and became the best-selling car in America in the mid-1990s.

What happened next would be criminal, except there aren't laws against corporate stupidity. Ford didn't invest to keep the Taurus competitive. Then it announced in 2004 it would kill the Taurus name -- until new CEO Alan Mulally ordered a stay of execution two years later.

The 2010 Taurus, which debuts next month, is a brand new start with sharp styling and the same $25,995 base price as the old, lackluster model. For more money you can add high-tech gadgetry such as forward-looking radar, adaptive cruise control, and a collision-warning system that applies the brakes when you get too close to the car in front of you. Together, these gizmos will allow you to drive from Detroit to Chicago without hitting either the brake or the accelerator. (I wouldn't suggest trying it, however.)

Ford's new Fusion Hybrid, meanwhile, gets 41 miles to the gallon in the city, versus 33 mpg for the Toyota Camry hybrid (with a similar price tag). The difference comes from lots of little things. Ford narrowed the slots on the wheel covers and changed the design of the fog lights, for example, to reduce aerodynamic drag.

Ford announced last week that it's reconfiguring a truck plant in Wayne, Mich., to build the new Focus compact. And a year from now the high-mileage subcompact Fiesta, engineered in Europe, will hit these shores. The Fiesta trails the Honda Civic and the Toyota Yaris in its time of entry to the U.S. market, but the vehicle's sleek styling will make it the best-dressed girl at the dance.

All this begs the question: How did the company develop all these new cars while losing so much money in recent years? The simple answer is that it borrowed billions from private lenders.

In late 2006, shortly after Mr. Mulally arrived from Boeing, the company mortgaged its factories, its equipment, and its real estate. Much of the impetus for this fund raising came from the company's now-departed chief financial officer, Don LeClair, whose pessimistic prognostications irked his colleagues but who proved prescient nonetheless. The company raised $23.6 billion -- the world's largest "home-improvement loan," as Ford officials said at the time -- to finance a complete product overhaul. That's right. There's wasn't a dime of government assistance.

Rival GM also raised money in 2006. Instead of mortgaging assets, however, the company sold 51% of its GMAC financial-services arm to Cerberus (the same private-equity firm that bought Chrysler a year later).

GMAC is now a bank holding company -- and it is reeling from losses of billions of dollars in the subprime mortgage market. GM, meanwhile, burned through its money faster than Ford, which was making tough decisions that GM ducked. Specifically, Ford sold off such cash-draining operations as Jaguar and Land Rover, while GM held on to its outmoded lineup of eight different U.S. brands. As a result, its standout cars -- such as the Chevy Malibu and Cadillac CTS -- got lost in the clutter.

Last week, GM reported a $6 billion loss for the first quarter. The company wants to wipe away 90% of its $27 billion in unsecured debt as part of its path to viability. But to do that it will almost certainly have to follow Chrysler into bankruptcy court. That will be the cleanest and quickest way for GM to get relief from obligations that it can't afford to meet. Beyond this, GMAC's status as a bank holding company qualifies it for government assistance that Ford's lending arm, Ford Motor Credit, can't get.

You can see where this leaves us. Ford has about $26 billion in automotive debt -- about the same as GM's $27 billion. Ford's debt is secured by its assets. And secured lenders must be repaid -- unless they happen to be Chrysler lenders and get clipped by a company bankruptcy plan that's backed by President Obama.

Ford's repayment schedule will be revealed today when the company files its 10-K, the comprehensive annual performance report, to the Securities and Exchange Commission. So Ford is like a homeowner who planned prudently and can pay his mortgage, while his spendthrift neighbors get their mortgage reduced by some new federal program.

Ford executives are probably fretting about this, but there isn't much that can be done. They already have exchanged some of their debt for equity, and might do more of that. But the bottom line is that we live in a world where wisdom can be punished and where foolishness can be rewarded.

Ford certainly wouldn't want to trade places with GM or Chrysler right now. Let's just leave it at that.

Mr. Ingrassia, a former Dow Jones executive and Detroit bureau chief for this newspaper, is writing "Crash Course," a book about the auto industry's crisis that will be published next year by Random House.

LINK:How Ford Restructured Without Federal Help - WSJ.com

Rick

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