Ford says its recent offer to purchase up to $1.1 billion of its senior secured debt for no more than 47% of par value is oversubscribed, and that the company is doubling the purchasing program. Also, the company announced that as of the early tender deadline, $3.4 billion (par) of its unsecured notes had been tendered in response to a separate purchase offer, putting subscription at 78-88% of the announced ceiling with two weeks remaining in the offer period.
If the company’s coincidental efforts to convince (pay off) holders of its convertible debt to convert common stock is also successful, Ford will reduce its debt from nearly $26 billion to less than $15 billion, and will reduce its annual servicing costs by more than $200 million. Outstanding common shares would increase from 2.33 billion to as much as 2.86 billion.
DROOM or Doom?
The incentives for Ford to aggressively reduce debt by using up cash on the balance sheet would normally be offset by the chances such cash would be needed to fund operations until conditions improve. Many businesses, large and small, have failed because managers didn’t follow a simple axiom: DROOM. Don’t run out of money. However, in Ford’s case, DROOM doesn’t now exist. Ford can reduce its cash cushion to otherwise imprudent levels because the federal government is expected to provide new debt if needed. However, if the company’s prospects improve from here, Ford’s debt retirement at less than 50% of par looks like sheer genius.
Trust Preferred Still Preferred
At the same time the company announced these debt reduction programs, it announced deferment of payments to its cumulative convertible trust preferred shares (F-PS), which I wrote about here. F-PS, which is convertible into 2.8249 common shares, has since traded in near-lockstep with the common. Based on current prices (F-PS=8.33, F=2.90), the preferred is very preferable to the common, as it:
- Will be paid dividends of 26.5% if the company survives;
- Is convertible to common stock and so will share any common stock price appreciation; and
- Is higher in the capital structure, though this likely doesn’t matter.
[Before investing in F-PS, please understand the tax implications during the deferment period, which are discussed in my article cited above, elsewhere in Seeking Alpha, and on discussion forums at other sites. You may wish to consider buying this issue in a retirement account.]
Last time I pointed out that because the common and preferred were trading so closely to the conversion rate, shorting the common while buying the preferred was interesting. A commenter noted that the Ford shares are expensive to borrow, as bondholders who had agreed to a debt-common conversion had soaked up available shares to lock in the cash value of their transactions. As these transactions are closed, and Ford common becomes more readily short-able, it will be interesting to see if the price ratio remains so close to the conversion ratio.
While F-PS continues to look good as Ford continues to improve its chances of being a survivor (perhaps the survivor), the arbitrage play's elimination of bankruptcy risk may very well be the smarter way forward.
Disclosure: Author holds positions in F-PS, GXM