CEO Alan Mulally continues chipping away at debt.
Ford Motor Co.’s heavy debt load has become a significant drag on the company competitiveness in the minds of many pundits and Wall Street analysts, tarnishing Ford’s market share gains, quality gains and the success of its new product offensive.
Thus, it wasn’t exactly a surprise Ford elected to dip into its cash reserves this week and announce plans to pay off another $3 billion worth of debt. The move followed similar steps, late in 2010 that let the maker close the year with more cash than debt for the first time in a number of years.
The latest reduction in debt, scheduled for March 15th, will see Ford redeem for cash trust preferred securities held by Ford Motor Company Capital Trust II, company officials said.
The redemption will result in a $60 million charge against Ford’s first quarter earnings but it will save $190 million in interest expense annually, the maker stressed.
Ford officials said the redemption is the next step as the company continues to “aggressively strengthen its balance sheet.” Ford is also offering to change the preferred securities for shares of Ford common stock at a rate of 2.8769 shares per unit of preferred securities.
“We remain focused on reducing our automotive debt as the core automotive business continues to strengthen,” said Lewis Booth, Ford executive vice president and chief financial officer. “We are pleased with the progress we have made, and we are committed to continuing to improve our balance sheet to lay a solid foundation for a strong and profitably growing business in years to come.”
Last year, Ford cut its debt by $14.5 billion, though it still had another $19.1 billion of indebtedness. But the maker also had $20.5 billion in gross cash, achieving CEO Alan Mulally’s goal of having more cash than debt.
The heavy emphasis on debt reduction, the chief executive has stressed, is critical if Ford is to remain competitive with both its import and domestic rivals – the latter makers clearing much of their own debt off the balance sheets through their 2009 bankruptcies.
Ford’s strategy could also yield benefits by reducing the interest rate it pays on its borrowings.
Standard & Poor’s recently raised the maker’s corporate credit rating to BB-, and S&P analyst Robert Schulz has said there is a reasonable chance Ford could be upgraded again, this year, which would move it back into an investment grade rating.
The latest debt reduction could also encourage investors and analysts who were disappointed with the maker’s latest quarterly earnings report, even though Ford went $6.6 billion into the black during 2010. (Click Here for that story.)