Ford has just mortgaged itself to the tune of $18 Billion to enable funding of it's restructuring and new model programme.
The money raised is against all it's US properties/businesses.
It does not include Landrover, Jaguar and Aston although it does include stock in Volvo - suggesting that LR, Jaguar and Aston could still be sold.
Are they getting desperate or what ?
I dread to think what would happen if the restructring programme is not successful.
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One wonders who the lender, and potential future owner of Ford, may be.
Obviously the Saudis haven't got the money.
The Cali cartel perhaps? Or some football player?
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Toyota are sat on $226 Billion of assets - Fords mortgage would almost be small change for them.
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Perhaps Bill Gates of Microsoft has loaned the money.
Only trouble with that would be that the cars will be full of bugs; they'll crash twice a day; and if you complain to the dealer he'll either tell you to switch the engine off and on a few times, or blame the petrol you are using!
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Colin-E
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Most companies have debt to pay off. Since loans are cheaper than shares to issue due in part to tax and risk issues. I can't see the problem with an $18bn mortage
The key thing in looking at a company's prospects is the total net worth of the corporation. That is the value of shares + the value of debt.
It may surprise you that if Ford payed off all it's debt it would be a bad sign for the U.S car market. Infact high levels of debt indicate the financial markets take the view that the U.S car market will be stable for forseable future. It would be intersting to know what Fords stock price is doing though. If it is very volitile then Ford's in trouble, if it's not very volitile then Ford has nothing to worry about.
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Torque means nothing without RPM
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>I can't see the problem with an $18bn mortage<
I realise that most companies have debt while also announcing a profit/loss etc but when a company needs to do what Ford has done it is because it is desperate and has no cash to finance it's restructuring.
At the end of the day most financial observers/analysts will always look at a Company's cash position to determine if it is financially strong or not.
Ford are financially weak - very weak - and to suggest that there is not a problem with mortgaging your company up like this, does not make any sound business sense IMO.
You have got me on the high levels of debt bit as well -are you saying that while ever companies are loaded with debt they are succeesful and stabilise markets ?
Try telling Rover that.
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You are right that financial analysts will look at a companies ablitiy to raise cash. I was just using the volatility of the stock price as one gauge of this abilitiy.
I am not saying companies that are sucessfull will be 'loaded' with debt, but a sucessfull company the size of ford will have some debt to engerneer a healthy balance between debt and equity.
The conundrum is that the more stable the market the firm operates in, the higher the debt the company should have, all things being equal. The flip side the coin is that highly indebted companies destablise markets.
As I have said before I like using share price volitility to measure when a company's in financial distress.
Another way of looking at how debt alters the risk and return for shareholders consider this. A companies cashflow is divided into 2 channels 1. The payment of interest and 2. Profit.
For a given cashflow, profit is the remainder after the payment of intrest. The value of the firm must equal the debt of the firm plus the value of the firms equity. The holders of debt in other words have first prioty any cashflow the firm has, but shareholders experiance all the upside risk.
Lets take a firm and say it has a value of $100bn in debt and equity(discounted cashflow). $90bn of it is in debt, and only $10bn of it is in equity. This firm anounces a brilliant new idea and its value rises to $110bn. The value of debt stays constant, but the share price doubles!
Lets take the same firm but say it has no debt and equity worth $100bn. It has the same idea but the share price only rises by 10%.
As we can see in this example debt has increased the volitlity share prices and has thus increased market instablility. Markets require certain risk and return characteristics, therefore when market conditions change for an industry it makes sense to change the equity/debt ratio.
We can now see that debt would be higher in a stable market and that debt can destablise markets.
Do any of the firms that Ford owns make money? What I am thinking is if Ford is currently in financial distiress the banks that give Ford any new money will dircect these the sales of these companies, not the management of Ford. If Ford does look like it will go bankrupt what the lenders on any new money may stipulate is that Ford has to sell the companies it owns before defaulting on their borrowed money.
For a company like Ford a large debt of $18bn is a bad sign since Ford probably is now in financial distress and may end in tears. On the upside it shows that the cashflow that Ford currently generates is realitivly stable. Chapter 11 (the main bankruptcy law in America) alows firms to write off their debts (or not be resposible for them anymore) as long as the firm can show itself to be a profitible entity without debt. If chapter 11 is invoked then Ford has a good chance of getting a big shot in the arm and for it to become much harder to beat for GM. The disadvantage of chapter 11 is that Ford can continue to operate, become stronger and then force GM into bankruptcy because of Fords increased competition.
This has created a lot of controversy in the airline industry post september 11th. A lot of airlines filed for bankruptcy and shed their debts, thus forcing another wave of bankruptcy as the weaker airlines had to cope with the new strong debt free companies . Like the car industry the airline industry suffers from chronic overcapacity. The Chapter 11 is one reason why.
Do any of the firms that Ford owns make money? What I am thinking is if Ford is currently in financial distiress the banks that give Ford any new money will dircect these the sales of these companies, not the management of Ford. If Ford does look like it will go bankrupt what the lenders on any new money may stipulate is that Ford has to sell the companies it owns before defaulting on their borrowed money.
What thus is of most interest is not the headline figure of debt Ford has, but what the markets have made of it. Indeed the most interesting feature is that fact Fords debitors may now control the possible sale of the companies Ford owns and again we need to look at the volitility of Fords stock price, that will give us a clue as to Fords ability to raise money.
Apologies for long post - Hard when you have lots to say!
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Torque means nothing without RPM
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The biggest problem Ford now face is not actual financial meltdown (although it could happen), or interference from creditors but the "stink of death".
With more potential costumers clocking onto the severity of Ford's troubles, it is bound to make people think twice before buying a Ford branded vehicle (although will have little effect on PAG sales for the most part). This is one of the key problems Rover had in its twilight years, aside from financial and development issues, which, of course are directly related to previous poor sales due to natural consumer reticence when a firm is obviously on the brink. (N.b. I appreciate there were many other factors affecting the Rover situation too, not least some very bad press and outdated products)
Not many people want to end up with an expensive car from a manufacturer that is likely to go under any time soon. Or at least, not until they have gone bust and then everyone tries to grab a post-bankruptcy bargain...
I would argue that this "stink of death" issue has been less of a problem for General Motors during their troubles, because the vast majority of their vehicles are not branded GM. Ask most regular people who owns Vauxhall and they wouldn't have the faintest, same would no doubt apply to Opel, Holden, Buick, Chevrolet etc the world over.
However, when Mr Average sees the news headline suggesting Ford are going under sometime soon, he can look out on his driveway and see a Ford badge staring back at him. It's difficult not to make the connection then! :)
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Also, in reply to mk124, share price volatility does appear to be an excellent measure of just how much trouble a company is in. But that can't tell you how consumers will react in the next 6-12 months to current and refreshed product lines. Who knows, if Ford can sell cars people actually want in the US and gets to the other side of these voluntary redundancies next year, then the situation could change very rapidly. GM are a little ahead of Ford in the same process, and their is sign of a return to profitability.
If banks did decide to get pushy and force Ford to sell off assets, there could be issues. Volvo could be sold off as it is often claimed that is the only automotive company within Ford to actually turn a profit. Nobody of consequence seemed genuinely interested in Jaguar/LR (very closely linked these days) or Aston Martin when they were banded about on the market recently, so they would be unlikely to be sold.
However, who would buy Volvo? Without the support of Ford, Volvo Cars could well have gone the way of Rover by now too. The Volvo management were desperate to find a partner for years, with a tie-up to Renault the preferred solution. It never quite happened before (except for the truck division of Volvo) so I don't see why it would happen now, although the new Renault/Nissan alliance could change that situation, if GM stay out of the picture.
Even selling off Volvo could be logistically problematic, Volvo are still a separate company (unlike Land Rover and Jaguar for instance), but that line is getting progressively blurred as platform, engine and design/engineering sharing mean that a parting of the ways would not be a simple exchange of ownership as it might have been 2-3 years ago.
Other options? On the extreme end, Jaguar and Land Rover could be simply shut down, or pared down significantly. No point keep throwing cash at something that will make you no money.
I foresee more factory closures in Europe, severe cost cutting across the model range, trimming of product lines (less choice in a model range, fewer options to choose from) and of course, more redundancies.
If I was working in Halewood, Castle Bromwich or Solihull, I'd be getting nervous right now. There's no real reason why any of these vehicles have to be made in the UK. Dagenham should be safe enough, as enough investment is still being poured in there to keep it viable for some time, and engine manufacture doesn't appear to be so location dependent on cost terms.
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No apology needed - excellent and informative post mk124
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