More than a decade after the last economic crisis, Ford Motor Company is still paying down a fatgovernment loan createdby Congress at the start of the Great Recessionto aid automakers withfactory projects.
Critics at the time focused on General Motors and Chrysler, each declaring bankruptcy andacceptinggovernment bailout loans through the U.S. Treasury Department'sTroubled Asset Relief Program(TARP)to reorganize during the auto crisis that hammered the industry between2008 and 2010. Meanwhile,Fordtook a different path.
But in the end,it accepted a government loan, too.
The debtremains on Fordbooks todayas the company navigates a pandemic.
In September 2009, Ford entered into an agreement with the Department of Energy and borrowed$5.9 billionas part of a loan program created to finance automotive projects designed tohelp vehicles built in the U.S. meethigher mileage requirements andlessen U.S. dependence on foreign oil.
The company isone of three auto recipients currentlylisted on theAdvanced Technology Vehicles Manufacturing (ATVM) loan program site.
Whilecritics of government assistance, including Ford executives, stillfocus onthe government bailouts, few have mentioned in recent yearsthe loan program that handed out money during the same time period explicitly to shore up automakers.
Then-CEO Alan Mulally is praised for having the foresight to mortgageeverything just prior to thatcrisis, including the Blue Oval, because Ford was in trouble before anyone else and took action before anyone else.
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Ford, Nissan and Tesla are listed as loan recipients of a program that had strict financial solvency requirementsto qualify. Nissan was awarded $1.6 billion for itsTennessee operations.Tesla garnered $465 millionfor California operations
Both Tesla and Nissan had fully repaid their loans as of September 2017, according to CNBC. Ford had not.
While Tesla stocksurges, Ford is furiously working to shore up its financials.
The loan plus interest creates an additional burden for Ford as cash supplies shrink.
"As of December 31, 2019, an aggregate $1.5 billionwas outstanding," Ford disclosed in its most recent 10-K filing with the U.S. Securities and Exchange Commission. "The ATVM loan is repayable in quarterly installments of $148 million, whichbegan in September 2012 andwill end in June 2022."
Documents filed by Ford show the company owes payments of $591 million in 2020, $591 million in 2021 and $289 million in 2022.
"They'll have to come up with a way to pay,otherwise they'll ultimately pay more for the privilege of borrowing," said Charles Elson, director of the Weinberg Center for Corporate Governanceat the University of Delaware."This is the sort of thing that keeps people up at night. This is a 3 o'clock in the morning problem for the management team."
Dark days
During good times, automotive analysts said, Ford could have socked away money and paid offdebt in anticipation of bad times. That didn't happen.
"This is now very unpleasant and very difficult," said Elson..
In applying for the loan, Ford said the money would be spent to upgrade 13 facilities in Michigan, Illinois, Kentucky, Missouri, New York and Ohio — "resulting in state-of-the-art assembly and manufacturing plants" with flexibility to build fuel-efficient vehicles that meet changing demands.
The government site notes that "Ford updated several facilitiesto continue improving fuel efficiency in more than a dozen popular vehicles, including the Escape, Fiesta, Focus, Fusion and Taurus car models, as well as the F-150 light-duty truck."
On a side note, the Fiesta has always been builtin Mexico. Production of the Fiesta, Focus, Taurus and Fusion will have been discontinued by the end of 2020. The company this year settled a class-action lawsuit involving a defective transmission inits Focus and Fiesta vehicles.
Ford is praised on the government website for its "commitment to introducingnew hybrid, plug-in hybrid and all-electric vehicles."
Chump change
Ford says the government debt payments are"relatively small" and causeno alarm.
"The loan matures in June 2022. We plan to pay off the loan in full and on time," T. R. Reid, Ford spokesman, told the Free Press on Tuesday. "At the end of Q1, the principal balance was $1.3 billion."
When asked whether Ford had requested deferral of its loan payments, Reid said additional information would be revealed in upcoming regulatory filings.
$5 billion bruise
Ford isn't alone in the struggle, but it entered 2020 reporting a much smaller-than-expectedprofit than its competitors. Executives said they were disappointed and promised to do better.
The Ford earnings report for the first three months of 2020 reflected a$2 billion loss, which was mostly unrelated toCOVID-19. Ford later warned Wall Street to expect a $5 billionloss in the second quarter, reflecting the impact of shuttering factories between March and May.
Tim Stone, chief financial officer at Ford, has saidthe company believes it has enough moneyto get through 2020. Ford reported in April that it had $34 billion in cash on hand and $35 billion in liquidityat the end of the first quarter.
Ford this month went back to the banks to seek extension on $5.35 billion in loansfrom banks including J.P. Morgan Chase.
"The company is looking to complete the extension ahead of itsearning call on July 30," according to Reuters. "They want to be prepared so they can say something good. That they were able to extend the liquidity another year."
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Cash flow, or liquidity, is alifeline during crisis.
On March 19, Ford announced that it was borrowing$15.4 billion against two lines of credit. The company also withdrew guidance for its financial performance because of unpredictable circ*mstances.
"Ford Motor Company is taking a series of initiatives to further bolster the company’s cash position amid the coronavirus health crisis," the company said at the time.
Still, the costs associated with renegotiating financial deals are nottrivial, said professor Kara Bruce at theUniversity of Toledo College of Law, who specializes in bankruptcy and commercial law.
"I can tell you, when a company is negotiating with its creditors, the bankruptcy alternative is at the forefront of those discussions," she said. "Dealing outside of bankruptcy offers parties a lot of control they don't always have in bankruptcy."
Ford CEO Jim Hackett released a statement, “Like we did in the Great Recession, Ford is managing through the coronavirus crisis in a way that safeguards our business. ... We plan to emerge from this crisis as a stronger company.”
Meanwhile, Ford has declined to discuss financial details when asked duringtwo of its recent meetings hosted by prominent banks.
"Ford isin the final days of a scramble mode — paying one credit card with another credit card until the gig is up," said market analyst Jon Gabrielsen.
One of the nation's top bankruptcy lawyers, whosefirm prohibited him from being named because itworks with the auto industry,saidFord's"substantial losses are cause for concern."
Grim reality
Still, candor isn't always an option, said John McElroy, longtime industry observer and host of "Autoline After Hours."
"Even though things are really tough, you've got to say, 'We're going to come out of this and be OK,' " he said. "To come out and say, 'Man, we're in deep trouble,'— the financial markets would go crazy. Suppliers would start to worry. Employees would be demoralized. It's a real tightropeto tell the truth without setting everybody's hair on fire."
Recent borrowing has signaled a grim reality, however.
"At the very beginning of the pandemic, when GeneralMotors and Ford announced how much money they were going to borrow, it set offalarm bells in my mind," McElroy said. "It was obvious they expected financial devastation in the marketplace and went to get money to carry them through. Now, just recently, we've seen Ford go back to the banks and ask them for another year before they have to pay that money back. So, clearly Ford believes the situation is worse now than what it thought three months ago."
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No question, Ford is under scrutiny.
"This will be a difficult earnings report for Ford," said David Kudla, CEO and chief investment strategist with Mainstay Capital Management, a Grand Blanc investment adviser who manages $2.7 billion in assets for clients who include many Ford employees.
"Ford was in trouble when times were booming," McElroy said.
Keep hope alive
Dire predictions about Ford are premature, Reid said.
"People who follow us closely know Ford’s balance sheet was consciously strong leading up to the pandemic," he said. "That cash and liquidity, together with additional cash management and preservation and cost reductions, is why we’re able to both manage through the crisis and strategically invest in Ford’s future."
Ford is not worried, Reid said.
"We had financial flexibility in 2008 and have deliberately managed the balance sheet since then so that we’re well prepared for economic downturns — including this one," he said.
Contact Phoebe Wall Howard: 313-222-6512 orphoward@freepress.com.Follow her on Twitter@phoebesaid. Read more on Ford and sign up for our autos newsletter.
