FORD Launches More Debt Conversion Offers for 2016 and 2036 Notes

[68fastback]

Great to see Ford aggressively persuing converting this debt ...hope it's well-subscribed!

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FORD ANNOUNCES LAUNCH OF CONVERSION OFFERS


Ford Motor Company has launched conversion offers relating to its 4.25% Senior Convertible Notes due December 15, 2036 and its 4.25% Senior Convertible Notes due November 15, 2016, in which it will pay a premium in cash to induce the holders to convert convertible debt for shares of Ford’s common stock
Any shares issued pursuant to these conversion offers are already reflected in Ford's fully diluted earnings per share calculation
The conversion offers are expected to further strengthen Ford's balance sheet by reducing its Automotive debt and to reduce on-going Automotive interest expense
More... (http://media.ford.com/article_display.cfm?article_id=33472)

[Little Debbie]

this is actually pretty interesting. never seen nor heard of any company doing this. is this a first?

from the accounting perspective, any note payable converted to stock would reduce liability while increasing both available cash and equity. Certainly a win-win for the balance sheet.

wonder how this plays into valuation, though. Dave? Mike?

[68fastback]

dunno re valuation, tho Ford said their latest statements reflect the net effect.

Ford has offered similar conversions twice before debt instruments held by UAW (and open to others) to stock and it was so successful (over-subscribed) that it was re-run for a second round (both were in the vicinity of $3.9-4B, as I recall). That was when the stock was betw $1.54 and 1.87 as I recall and the UAW has since cashed-in several $B at $12+ ...so that was a big win-win for both Ford and the UAW (and anyone else who jumped in) even tho the equivalent stock value needed to break even on those conversions was mid-$8.xx/share. Then again, the UAW had little realistic choice at the time, imo, since if Ford went belly-up, the retirement/etc funds would have gotten close to zip. I guess when a company mortgages is very name for $Bs you sort of have to trust the situation is dire and such an offer a very reasonable alternative (no worse downside, bigger potential upside, working capital for the company you're dependent on) assuming the company survives. Thankfully it did.

For the 2016 notes it seems to translate to (not accounting for interest accrued) to $7.30/share with the $215/$1000 subtracted ($9.30/share without). So it would seem it's a good deal (vs the 4.xx% of the notes run to maturity) if it's felt Ford will stay above that $7.30/share thru 2016 note date. If I calculated correctly, the 2036 offer translates to $7.45/share (also doesn't account for interest since I have no clue how to value that).

Dunno if this current offer to retire/convert debt is structured very similar to the earlier offerings but they seem somewhat similar to my amateur eyes ...maybe Dave or Mike has some insight on this.

Maybe it's because I don't fully understand all the implications, but the 2016 offer seems the more realistic since it's hard to comprehend what the industry might even look like in 2036, let alone the risks over the next quarter-century+

[Alloy Dave]

this is actually pretty interesting. never seen nor heard of any company doing this. is this a first?

from the accounting perspective, any note payable converted to stock would reduce liability while increasing both available cash and equity. Certainly a win-win for the balance sheet.

wonder how this plays into valuation, though. Dave? Mike?I believe the other side of the entry would be to the equity section of the balance sheet. There is no overall impact on valuation. however, the goal is to reduce borrowing costs...the rates on debt are high. Determining optimal capital structure is a tricky subject managed by the Treasury group. I work in Treasury for my company, but not in that specific area. Debt costs more, but the interest payments are tax deductible...thus the trade off.

This happens all the time, just that it's so technical you rarely hear about it. If you look at any company's 10K report, you'll see all sorts of footnotes about convertible debt, subordinated debentures, and all other sorts of complex financial arrangements.

[Black Vert SS]

I believe the other side of the entry would be to the equity section of the balance sheet. There is no overall impact on valuation. however, the goal is to reduce borrowing costs...the rates on debt are high. Determining optimal capital structure is a tricky subject managed by the Treasury group. I work in Treasury for my company, but not in that specific area. Debt costs more, but the interest payments are tax deductible...thus the trade off.

This happens all the time, just that it's so technical you rarely hear about it. If you look at any company's 10K report, you'll see all sorts of footnotes about convertible debt, subordinated debentures, and all other sorts of complex financial arrangements.

This is what I don't understand about debt. Sure the interest is tax deductable but either you pay the bank (interest) or you pay uncle sam (tax). The fact still remains that you are paying somebody.:boink: Plus you get taxed on the principle for each loan payment you make. So at the end of the year I get told by my accountant that I have x dollars of income and I always ask why? I don't have any extra money because I paid loan payments. And I am told the principle was considered income. But I used money I made to pay the loan and I originally used the loan to buy equipment so it really wasn't income.:doh2: So now I just try to pay for everything outright. I would rather have no worry about debt and pay the tax.

[Birdman]

So now I just try to pay for everything outright. I would rather have no worry about debt and pay the tax.

Exactly ! My policy as well...:yes: No Debt is the way to go if at all possible unlike the clowns in Congress who just don't have a clue when it comes to fiscal responsibility....:nonono: :banghead:

[Alloy Dave]

This is what I don't understand about debt. Sure the interest is tax deductable but either you pay the bank (interest) or you pay uncle sam (tax). The fact still remains that you are paying somebody.:boink: Plus you get taxed on the principle for each loan payment you make. So at the end of the year I get told by my accountant that I have x dollars of income and I always ask why? I don't have any extra money because I paid loan payments. And I am told the principle was considered income. But I used money I made to pay the loan and I originally used the loan to buy equipment so it really wasn't income.:doh2: So now I just try to pay for everything outright. I would rather have no worry about debt and pay the tax.
Jeff I don't understand. What do you emean you pay taxes on the principle for each loan payment? That's not true unless I'm misunderstanding what you mean. What kind of loan are you talking about? What is the corporate structure you use? If you are using a Subchapter S-partnership, that may be why...those are complex and I admit I don't understand how they work.

yes you pay to either uncle sam or the bank, but the rates are very different. A typical bank loan might be around 8%, and taxes on income (which you would pay to uncle sam) are 40% for corporations. (note this may not apply to S-Corp or LLCs).

THe main reason most companies use depreciation rather than "paying outright" for items is that they can defer taxes, utilizing the time value of money (TVM). The basic premise is that I'd rather pay money to the government later than pay it today because I can invest the money now and earn income on it.

[Black Vert SS]

Jeff I don't understand. What do you emean you pay taxes on the principle for each loan payment? That's not true unless I'm misunderstanding what you mean. What kind of loan are you talking about? What is the corporate structure you use? If you are using a Subchapter S-partnership, that may be why...those are complex and I admit I don't understand how they work.

yes you pay to either uncle sam or the bank, but the rates are very different. A typical bank loan might be around 8%, and taxes on income (which you would pay to uncle sam) are 40% for corporations. (note this may not apply to S-Corp or LLCs).

THe main reason most companies use depreciation rather than "paying outright" for items is that they can defer taxes, utilizing the time value of money (TVM). The basic premise is that I'd rather pay money to the government later than pay it today because I can invest the money now and earn income on it.

I probably didn't explain very well. If I get a $50,000 loan, at the end of the year it goes on my tax return as $50,000 of income even though I used that money to buy equipment. So I don't really have $50,000 of income ( in my opinion ) because I spent the money. I know that I can deduct the interest part of the payment but the principle is considered income, so in essence I am getting taxed on it, right? Now, if I have $50,000 in the bank and buy a truck outright, I can deduct the entire purchas, I can get depriciation and more importantly I am not in debt to anyone. I probably know less about money than i do about cars but I have been told by several CPA,s to pay for things if I can. Plus I hate being in debt.

[Boston Mike]

dunno re valuation, tho Ford said their latest statements reflect the net effect.

Ford has offered similar conversions twice before debt instruments held by UAW (and open to others) to stock and it was so successful (over-subscribed) that it was re-run for a second round (both were in the vicinity of $3.9-4B, as I recall). That was when the stock was betw $1.54 and 1.87 as I recall and the UAW has since cashed-in several $B at $12+ ...so that was a big win-win for both Ford and the UAW (and anyone else who jumped in) even tho the equivalent stock value needed to break even on those conversions was mid-$8.xx/share. Then again, the UAW had little realistic choice at the time, imo, since if Ford went belly-up, the retirement/etc funds would have gotten close to zip. I guess when a company mortgages is very name for $Bs you sort of have to trust the situation is dire and such an offer a very reasonable alternative (no worse downside, bigger potential upside, working capital for the company you're dependent on) assuming the company survives. Thankfully it did.

For the 2016 notes it seems to translate to (not accounting for interest accrued) to $7.30/share with the $215/$1000 subtracted ($9.30/share without). So it would seem it's a good deal (vs the 4.xx% of the notes run to maturity) if it's felt Ford will stay above that $7.30/share thru 2016 note date. If I calculated correctly, the 2036 offer translates to $7.45/share (also doesn't account for interest since I have no clue how to value that).

Dunno if this current offer to retire/convert debt is structured very similar to the earlier offerings but they seem somewhat similar to my amateur eyes ...maybe Dave or Mike has some insight on this.

Maybe it's because I don't fully understand all the implications, but the 2016 offer seems the more realistic since it's hard to comprehend what the industry might even look like in 2036, let alone the risks over the next quarter-century+

I haven't read the conversion offers at all, but I would guess that in some way, this would be a form of reducing debt to allow them to capitalize on better financing rates in the market currently. With a better looking balance sheet (less debt) and continued historically low interest rates combined with better performance and the entire auto sector coming out of the catastrophe of late 2008, Ford may be able to acquire cheaper long term loans/bonds than the current converts. I'm not really sure what kind of spread Ford debt trades at now, but likely their 2016 debt could be cheaper to them than 4.25% since 10 years US treasuries are currently in the 2.5% - 2.75% range. It also may just come across as another good PR move ahead of GM's IPO which IMO is going to fall a bit flat as institutional investors may be a bit wary, what with 4 CEO's in 18 months.

[68fastback]

I might be wrong but I thing what Ford is doing is very simple, conceptually anyway. They have hard debt due variously in 2016 and 2036 at whatever rates. This offers to trade hard debt in return for 'good faith' investment returns based only on the performance of the business -- potentially worth more or portentially not worth 1 red cent -- but no longer hard debt on the books.

As I see it it's like if I owe you $100 so I propose to offer you a shares of the future good faith of others in me in exchange for the current $100 hard debt. If others like how I'm doing it may be worth substantially more ...if not it's potentially worthless.

Ford did sweeten the pot a bit by offering something like 20% cash up front as a debt-conversion incentive. Pretty decent deal for 2016, I think, since the incentive seems to offer a bit more than the annual payout of the hard debt ..so, in essence, the 2016 principal due is being traded (offer) for stock on the bet of the stockholders view of the performance of the company over the next few years ...and at a pretty reasonable share conversion price, it would seem given Ford's positioning in the industry and product in the pipeline.

And not a bad idea too to try to kick the shoes a bit out from under GM's IPO which is not being received all that well from what I've read. Possibly Ford is even offering this right now to expressly offer an investment alternative to the GM offering as well? :weg:

[Alloy Dave]

I probably didn't explain very well. If I get a $50,000 loan, at the end of the year it goes on my tax return as $50,000 of income even though I used that money to buy equipment. So I don't really have $50,000 of income ( in my opinion ) because I spent the money. I know that I can deduct the interest part of the payment but the principle is considered income, so in essence I am getting taxed on it, right? Now, if I have $50,000 in the bank and buy a truck outright, I can deduct the entire purchas, I can get depriciation and more importantly I am not in debt to anyone. I probably know less about money than i do about cars but I have been told by several CPA,s to pay for things if I can. Plus I hate being in debt.
Thanks Jeff...must be some odd ownership arrangement such as a Subchapter-S corp....I'm not familiar with the taxation rules in that regard.

[68fastback]

...but when you buy a truck with the $50K loan, while the loan showed as income, the truck showed as expense, so it then seems tax-neutral, but I see what you mean that it inherently makes questionable sense to consider a loan as income. It might be better that it's not considered income but then that anything bought with it can't be considered expense either -- tho the interest could be treated consistently either way. Otherwise, it would seem they treat it this way so that money can't be 'floated' as (non-income) loans and then taken as expense, re-paid, then re-floated, etc, making multiple turns thru the business in a single year while accruing multiple deductions on the same money. So, maybe, that's their rationale?

[Gr8snkbite]

:thereyougobeinglogical: