DBRS Comments on Ford’s Proposed Debt Restructuring

DBRS has noted that Ford Motor Company (Ford or the Company) announced today a series of offers pertaining to the restructuring of its automotive debt obligations. Concurrently, the Company provided an update on its tentative agreements with the United Auto Workers (UAW) regarding, among other items, future Voluntary Employee Beneficiary Association (VEBA) payments. While the attempted measures are viewed positively by DBRS, at present there are no resulting rating implications. DBRS notes that there remains considerable execution risk with respect to every major component of the proposed debt restructuring. Additionally, DBRS further notes that Ford must also demonstrate continued progress with respect to other aspects (e.g., operations, cost and capacity reductions, product portfolio, etc.) of its attempted transformation. This progress will be all the more challenging in the face of global automotive industry conditions that appear to be deteriorating even more than l2008’s severe downturn.

Today’s announcement is aimed at restructuring Ford’s automotive debt. As of December 31, 2008, total automotive debt amounted to $25.8 billion (this does not include the VEBA obligations discussed later).

The Company, in conjunction with Ford Motor Credit Company LLC (Ford Credit), announced various offers, briefly outlined below, with respect to the restructuring of these obligations.

(1) Ford Credit announced a cash offer of up to $1.3 billion to purchase certain series of the senior unsecured notes. DBRS notes that the tender offer consideration varies from 27% to 52% of the respective face amounts (in each case supplemented by an early tender premium of 3%), with the highest consideration being offered to the 9.50% debentures due June 1, 2010.

(2) Regarding the convertible notes, Ford is offering a common stock conversion supplemented by a cash premium, specifically each $1,000 principal amount of the convertible notes is subject to an offer of 108.6957 shares of Ford common stock plus an $80 cash premium.

(3) Ford has announced its intention to defer future interest payments on these securities, beginning with the payment due April 15, 2009. The Company pointed out that it is permitted to defer such payment for up to 20 consecutive quarters.

(4) Regarding the senior secured term loan debt, Ford Credit has announced a cash offer in the amount of $500 million to purchase these loans on an auction basis, with a price range of not less than 38% of par and nor greater that 47% of par.

If the above measures are successfully executed, Ford’s debt and VEBA obligations would be materially reduced, providing the Company with significantly greater financial flexibility to weather the severe global automotive downturn.

However, DBRS notes that, apart from its financial burden, several other aspects of Ford’s attempted transformation remain. A key component of the Company’s strategy entails an increased focus on Ford’s core brands. As such, the Company completed the divestitures of several non-core brands, including Aston Martin, Jaguar and Land Rover. Ford has also reduced its stake in Mazda and is currently reviewing its options with respect to Volvo.

As for product planning, while Ford will continue to offer a full assortment of vehicles (i.e., from small cars to large pickup trucks and sport utility vehicles (SUVs)), the Company will place an increased focus on small and midsize cars in response to the recent distinct shift in vehicle segmentation (i.e., away from larger vehicles and toward smaller, more fuel-efficient models).

Finally, Ford has emphasized the strategic importance of Ford Credit, whose objective is to consistently support the sale of Ford vehicles. Ford retains whole ownership of Ford Credit. This is seen to be a distinct advantage vis-à-vis General Motors Corporation and Chrysler LLC, which no longer have total control of their respective captive finance companies. This gives Ford greater flexibility in supporting vehicle sales, particularly in the current environment of very tight credit conditions.

DBRS acknowledges the progresses made by Ford as well as the strategic merits of the Company’s announced initiatives, which, if successfully executed to a substantial degree, would likely have positive rating implications. However, DBRS is currently not taking any action with respect to the ratings, which have a Negative trend, in light of the significant cash burn of the automotive operations and the severe automotive industry conditions. Future rating action will depend on an aggregate assessment of the Company’s progress in its transformation in the context of prevailing industry conditions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.