DETROIT (Reuters) - Ford Motor Co on Wednesday announced a plan to cut its $25.8 billion in automotive debt by about 40 percent by offering creditors cash and new shares as it looks to slash financing costs at a time of plunging sales and tight credit.
Ford shares declined 15 percent after the announcement of the plan to cut its debt by up to $10.4 billion, which could increase the number of shares outstanding.
But the bonds of Ford’s finance arm jumped after the launch of the tender offer. Ford Motor Credit Co’s 7.375 percent bond due 2011 rose 3.5 cents to 62 cents on the dollar, according to MarketAxess.
Following Ford’s announcement, Standard & Poor’s cut its corporate credit rating on Ford to “CC” from “CCC+”, calling it a distressed debt exchange, while Fitch said it will not affect the current rating of “CCC”.
Fitch said it would view the offers as “a mild positive” to the company’s credit profile.
S&P said its downgrades do not reflect an increase in Ford’s risk of bankruptcy.
Ford’s plan represents an attempt by the second largest U.S. automaker to win the same kinds of concessions being negotiated by rivals General Motors Corp and Chrysler LLC while steering clear of the bankruptcy-like process its rivals face under the terms of their government bailouts.
Despite the plans for new share issuance, the debt restructuring would leave the Ford family with its controlling stake in the automaker under separate Class B preferred shares. The voting interest of those shares will not be diluted.
Ford said it was making up to $2.2 billion cash available for the debt restructuring, which included conversion of debt to equity and two cash tender offers.
The automaker is paying out between 30 cents and 55 cents on the dollar as incentive to covert its debt.
Ford has the potential to restructure up to $10.4 billion of debt, given the cash available and the prices, it said.
The automaker’s announcement is the latest step to bolster its finances and to maintain funding to complete a turnaround without seeking U.S. government loans.
Ford had earlier reached an agreement with the United Auto Workers union on contract changes to reduce its labor costs.
The UAW also had agreed to accept up to half of required payments to a union retiree healthcare trust, called VEBA, in stock, providing Ford with additional liquidity.
The UAW agreement is contingent on Ford pursuing restructuring action with other stakeholders, including debt reduction.
“If the above measures are successfully executed, Ford’s debt and VEBA obligations would be materially reduced, providing the company with significantly greater financial flexibility to weather the severe global automotive downturn,” DBRS ratings agency said in a statement.
Ford said it will pay a premium in cash to persuade holders of its 4.25 percent senior convertible notes due December 15, 2036, to convert to Ford’s common stock.
If all the convertible notes were tendered, Ford would have a full-year improvement of about $208 million in continuing operations, however the number of shares outstanding would increase by about 531 million, the automaker said in a regulatory filing.
Assuming all the notes were tendered, Ford would have a pretax gain of $1.7 billion that would affect second-quarter results, according to the filing and based on the closing stock price of $2 on February 27.
That also would raise the number of outstanding shares to about 2.856 billion, from 2.325 billion.
Separately, Ford’s finance arm began a $1.3 billion cash tender offer for the automaker’s unsecured, non-convertible debt securities, and another $500 million cash tender offer for Ford’s senior secured term loan debt.
Ford also announced its intent to exercise its right to defer future dividend payments on the 6.50 percent cumulative trust preferred securities of Ford Motor Company capital trust II beginning in April.
Separately, the New York Stock Exchange said it will suspend trading in Ford’s former parts subsidiary Visteon Corp and move to remove it from its listing.
The NYSE said the company had previously been notified that it had fallen below the NYSE’s continued listing standard for average closing price of less than $1 over a consecutive 30 trading-day period.
The common stock of Visteon would be suspended prior to the opening on Friday, NYSE said.
Visteon, which gets a third of its revenue from Ford, warned last week it was in danger of breaching its debt covenants as it posted its 10th consecutive quarterly loss.
Additional reporting by David Bailey and Kevin Krolicki; editing by Carol Bishopric