Ford Reaches Deep

The automaker puts up most of its auto assets as collateral for $18 billion in loans.
Author:
Publish date:

Updated from 9:10 a.m. EDT

While investors had expected a new financing package from

Ford

(F) - Get Report

to give its struggling operations a better cash cushion, the $18 billion deal announced by the automaker on Monday was larger than some on Wall Street anticipated.

With auto sales slowing amid economic uncertainty wrought by a slump in the housing market, Ford said it will shore up its cash position with $18 billion in financing. The company plans to use its U.S. auto plants and substantially all of its other domestic automotive assets and intellectual property as collateral, marking the first time Ford has turned to asset-backed loans.

Shares of the automaker recently were down 21 cents, or 2.5%, to $8.32.

Ford's new financing consists of a five-year senior-secured revolving-credit facility of about $8 billion, a senior-secured term loan of about $7 billion and capital market transactions of about $3 billion.

Analysts say the financing, and the use of its assets as collateral, provides stark evidence of just how dire Ford's financial situation has become. Its larger rival,

General Motors

(GM) - Get Report

, has taken similar steps with asset-backed financing, even as it sold off a majority stake in its profitable finance business to raise cash. Ford has so far refused to sell its own finance business.

"We expected Ford to replace its existing revolver with a secured facility, however the rest of the debt financing was a surprise," wrote Shelly Lombard, analyst with Gimme Credit, in a research note. "But the financing does make sense. We expected Ford to run through at least $5 billion of cash next year. At that kind of run rate, the company would have had only a few more years of liquidity, especially since it insists that it won't sell Ford Motor Credit."

The company said it is seeking the additional money to help address operating cash flow needs, fund its restructuring and boost liquidity in the event of a recession. Upon completion of the transactions, Ford expects to have automotive liquidity of about $38 billion by the end of the year.

Ford has been struggling with hefty losses in its North American auto business due to competition from overseas rivals, declining consumer demand for big trucks and a heavy cost burden.

In September, the company announced a sweeping restructuring plan that involves cutting its salaried workforce by a third, offering buyouts to all of its unionized hourly workers and closing plants.

"Although Ford announced its Way Forward restructuring plan a while ago, we see this new financing as an acknowledgement that its problems are more serious and may take longer to fix than it initially anticipated," wrote Lombard.