Ford Motor Company of Detroit: You rock!

From today's FT:

Ford Motor will cut its debt by almost 40 per cent through a debt-for-equity swap, further distancing itself from its ailing Detroit rivals General Motors and Chrysler.

Ford, which appeared to be the weakest of the Detroit carmakers up to about a year ago, said Monday that holders of $4.3bn of senior convertible notes, or 88 per cent of the total, had taken up its shares-and-cash offer. In addition, its financing arm, Ford Credit, has bought back $3.4bn of its parent’s unsecured non-convertible notes. Ford Credit previously took over $2.2bn of Ford’s term loans at a sizeable discount*.

The deals will cut the carmaker’s debt from $25.8bn to $15.9bn, and lighten interest payments by $500m a year, based on current interest rates.

GM and Chrysler have been unable to agree on debt-for-equity swaps with their lenders – unsecured bondholders in GM’s case and banks in Chrysler’s. Their dire financial condition has prevented them from offering as much cash as Ford. Furthermore, the prospect of bankruptcy clouds the value of their equity.

Unlike GM and Chrysler, Ford has also nailed down a deal with the United Auto Workers union to accept shares rather than cash for up to half the carmaker’s contributions to a new union-managed healthcare fund**. In contrast to the $17.4bn in government aid advanced to its rivals, Ford has managed to remain afloat without direct help from Washington.

Even so, Pete Hastings, bond analyst at Morgan Keegan, warned that the response was by no means a vote of confidence in the carmaker. "Ford benefits from bond investors turning in their bonds rather than saying: 'I think I will be better off two years from now'," Mr Hastings said. "Rather than take that risk, [investors] are taking their money now."

So yet again, debt-for-equity swaps are shown to be a superior alternative to government bail-outs; either the underlying business has some value, however minimal (in which case it is worth preserving, the only question is how this should be divvied up between shareholders and bondholders) or it doesn't (in which case there's no point bailing it out with taxpayers' money).

Armed with such examples, all we need to do is to educate the general public that banks could sort themselves out in this manner as well.

* The discount appears to be about sixty per cent of face value. According to CityAM, Ford used $2.4 billion cash and 468 million shares (worth about $1.8 billion) to buy $9.9 billion of debt, i.e. Ford's debt was worth about 40 cents in the dollar.

** I love the idea of paying off the unions with shares. Ultimately, the business would become a sort of worker-owned co-operative, it'd be interesting to see whether it fared better or worse than other manfacturers.