Ford: The Company That Mortgaged Its Own Logo

What happened

In September 2006 Bill Ford handed the chief executive's job to Alan Mulally, and two months later Ford announced it would raise about $18 billion, partly to protect against a recession nobody had yet declared. The credit agreement signed that December pledged the company's domestic assets, including the Blue Oval trademark itself, for a $7 billion term loan and an $11.5 billion revolver. Ford closed 2006 with roughly $46 billion of liquidity and a $12.6 billion net loss. In February 2009, with the credit markets shut, it drew $10.1 billion on that revolver, and one lender could not fund its share, because that lender was Lehman.

The case, start to finish

A founding-family CEO is the least likely person alive to pledge his family's logo. So he recruited someone who would, and then got out of the way.

Negative equity and an open window

In 2006 Ford took in $160.1 billion of sales and revenues and lost $12.6 billion. Its automotive pre-tax loss was $17.0 billion, and by year end stockholders' equity was negative $3.5 billion. Revenue was never the scarce resource in this story. Time was, because a restructuring costs money for years before it earns any.

The cost base is what makes that so dangerous for a car company. Plants, tooling, engineering and retiree obligations do not shrink in a quarter, while demand swings with the credit cycle, so when volume falls almost nothing falls with it. Product development has to continue through the downturn as well, or the recovery arrives with nothing to sell.

What Ford did have was an open credit market and assets still worth pledging. The question was not whether to borrow. It was how much to take, and on what terms, at a moment when nobody was forcing its hand.

Two decisions, fifteen weeks apart

On 5 September 2006 Bill Ford, Henry Ford's great-grandson and chief executive since 2001, handed the job to Alan Mulally of Boeing and became executive chairman. His own words in the filing: the turnaround required the additional skills of an executive who had led a major manufacturing enterprise through such challenges before.

On 27 November Ford announced plans to raise about $18 billion, to replace $6.3 billion of unsecured facilities, fund the restructuring, and, in the announcement's own words, protect against a recession or other unanticipated events. No recession had been called. On 15 December the Credit Agreement was signed: a $7 billion seven-year term loan and an $11.5 billion five-year revolver, secured by domestic plants, receivables, inventory, the stock of Ford Credit and Volvo, and certain domestic intellectual property, including trademarks. With a $4.95 billion convertible, the raise came to $23.5 billion.

The two decisions do not work apart. The collateral list includes the blue oval, and a founding-family chief executive defending his family's company is the least likely person alive to pledge it.

Why secured, why so much, why then

Pledging the assets was not a concession, it was what made a raise that size financeable at all. Ford's unsecured debt was deep in junk that quarter, cut to B- by Fitch in December 2006 and to CCC (high) by DBRS, while the secured facilities were rated several notches higher. An unsecured raise of this size was not available at a price Ford could survive.

Size mattered as much as timing. The $23.5 billion was sized against a recession that had not happened, which is why February 2009 was a phone call rather than a negotiation: with credit markets shut, Ford drew $10.1 billion on the revolving credit facility it had arranged two years earlier. One lender could not fund its $890 million share, because Lehman Commercial Paper had been in Chapter 11 since October 2008, which is as clear a demonstration as exists that a committed facility is only as good as the banks standing behind it.

Ford then used the distress rather than merely surviving it, retiring $10.1 billion of automotive debt principal in 2009 for $2.6 billion of cash and 468 million shares and booking $4.7 billion of net gains. GM and Chrysler went through government-funded bankruptcies that year. Ford earned $2.7 billion, a $17.5 billion swing from 2008. The collateral came back on 22 May 2012, when Moody's became the second of the three major agencies to rate Ford investment grade after Fitch on 24 April, and the agreement's own two-of-three condition released the liens automatically.

The window is open while you look like you do not need it

The honest ledger has to sit next to the triumph. Ford lost $12.6 billion in 2006 and $14.8 billion in 2008 before any of this paid off. The Credit Agreement banned the common dividend outright. Aston Martin, Jaguar, Land Rover and Volvo were sold in the same window, so the raise bought time and then Ford sold brands to buy more of it. And the familiar line that Ford took no government money is not quite right: it entered a Department of Energy loan agreement for up to $5.9 billion. What Ford avoided was Chapter 11 and the ownership terms attached to the auto bailout, not federal credit.

The transferable rule is uncomfortable because it inverts how borrowing feels. Credit is cheapest and most available exactly when you appear not to need it, and by the time the need is obvious to you it is obvious to the lender too. Fix the operations first, then finance from a position of strength sounds like the disciplined answer, and it schedules your visit for the moment the window shuts.

The second half of the lesson is quieter and harder. The decision that saved the company was one the incumbent could not have made, not for lack of judgment but because of who he was in relation to the asset. Knowing which calls you are structurally unable to make, and putting someone else in the seat in time, is a rarer form of ownership than making the call yourself.

Timeline

• Sept 5, 2006 Bill Ford, Henry Ford's great-grandson and CEO since 2001, hands the job to Alan Mulally of Boeing and becomes executive chairman. His own words in the 8-K: the turnaround “required the additional skills of an executive who has led a major manufacturing enterprise through such challenges before.”
• Nov 27, 2006 Ford announces plans to raise about $18 billion: to replace $6.3 billion of unsecured facilities, fund the restructuring, and “protect against a recession or other unanticipated events.” No recession had been called.
• Dec 15, 2006 The Credit Agreement is signed: a $7 billion seven-year term loan and an $11.5 billion five-year revolver, secured by domestic plants, receivables, inventory, the stock of Ford Credit and Volvo, and “certain domestic intellectual property, including trademarks.” With a $4.95 billion convertible, the raise totals $23.5 billion.
• Year-end 2006 Ford closes the year with roughly $46 billion of automotive liquidity, and also with a $12.6 billion net loss, a $17.0 billion automotive pre-tax loss, and stockholders' equity of negative $3.5 billion.
• Feb 3, 2009 Credit markets are shut. Ford draws $10.1 billion on the revolver it negotiated two years earlier. One lender cannot fund its $890 million share: Lehman Commercial Paper had been in Chapter 11 since October 2008.
• 2009 Ford retires $10.1 billion of automotive debt principal using $2.6 billion of cash and 468 million shares, via tender offers and an induced conversion, booking $4.7 billion of net gains. GM and Chrysler go through government-funded bankruptcies. Ford earns $2.7 billion, a $17.5 billion swing from 2008.
• Apr 24, 2012 Fitch upgrades Ford's senior unsecured debt to investment grade. One agency is not enough: the Credit Agreement releases the collateral only once two of the three major agencies say so.
• May 22, 2012 Moody's follows, to Baa3. That is the second of three, and Ford's 8-K the same day reports that “all conditions have been met for release of the collateral.” The liens release automatically. Ford gets the blue oval back.

You're in the owner's chair

December 2006. You run Ford. You lost $12.6 billion this year, your book equity is negative, and the restructuring will burn cash for years before it earns any. Lenders are still willing. How much do you take, and on what terms?

• Fix the operations first, then finance from a position of strength
• Take $23.5 billion — far more than the plan needs — secured by everything
• Raise only what the restructuring plan requires, and keep the assets unencumbered

$23.5 billion, in three pieces (December 2006)

• Five-year revolving credit facility: 11.5 $B
• Seven-year secured term loan: 7 $B
• Convertible notes: 4.95 $B

Per Ford's FY2006 10-K. The first two were secured by substantially all domestic automotive assets; the third was not. Total automotive liquidity at year-end 2006: roughly $46 billion, against a plan that did not yet contain a recession.

Business model

Design, build and sell vehicles through franchised dealers, and finance those vehicles through a captive lender, Ford Credit. Enormous fixed costs (plants, tooling, engineering, retiree obligations) sit on top of demand that swings with the credit cycle. When volume falls, almost nothing in the cost base falls with it. That asymmetry is the entire case.

Revenue model

Vehicle sales plus financing income. In 2006 Ford took in $160.1 billion of sales and revenues and lost $12.6 billion. Revenue was never the scarce resource. Time was, because a restructuring costs money for years before it earns any, and Ford had to buy those years from somebody.

Cost structure

Plants and tooling that cannot be shrunk in a quarter, a unionized workforce, legacy retiree obligations, and product development spending that must continue through a downturn or the recovery has nothing to sell. Against that: a balance sheet with negative book equity by the end of 2006.

Strategic challenge

Ford was losing money at a pace no normal balance sheet absorbs, its equity was negative, and the cure cost cash long before it produced any. But the credit window was wide open and the assets were still worth pledging. The question was not whether Ford needed money. It was whether to take far more than the plan called for, on terms that put the entire American company up as collateral, at a moment when nobody was forcing it to.

Key decision

Two decisions, fifteen weeks apart, and neither works without the other. The family owner gave up the CEO seat to an outsider who had run a manufacturing turnaround before. That outsider then borrowed against everything, trademark included, while lenders would still take the collateral. A founding-family CEO defending his family's company is the least likely person alive to pawn its logo.

What worked

Borrowing early, borrowing big, and borrowing secured. Ford's unsecured debt was deep in junk that quarter, with Fitch cutting it to B- in December 2006 and DBRS to CCC (high), while the SECURED facilities were rated several notches higher (BB at Fitch, B (high) at DBRS). Pledging the assets is what made a raise this size financeable at all. Size mattered as much as timing: $23.5 billion was sized against a recession that had not happened, which is why February 2009 was a phone call rather than a negotiation. Then in 2009 Ford restructured out of court, retiring $10.1 billion of principal for $2.6 billion of cash and 468 million shares.

What failed

The honest ledger. Ford lost $12.6 billion in 2006 and $14.8 billion in 2008 before any of this paid off. The Credit Agreement banned the common dividend outright. Aston Martin, Jaguar, Land Rover and Volvo were sold in the same window: the raise bought time, and Ford sold brands to buy more of it. And “Ford took no government money” is not quite true, because it entered a Department of Energy loan agreement for up to $5.9 billion under the Advanced Technology Vehicles Manufacturing program. What Ford avoided was Chapter 11 and the ownership terms that came with the auto bailout, not federal credit.

Risk factors

A secured raise this large is a one-shot weapon: once the collateral is pledged there is no second raise behind it. The borrowing base and $4 billion liquidity covenants tighten precisely when cash is scarce. Committed facilities are only as good as the banks behind them, as Lehman's unfunded $890 million showed. And a lender holding your trademark also holds your recovery: the covenants set the dividend, and the ratings set the covenants.

Lesson summary

Capital is cheapest and most available when you least appear to need it, and by the time the need is obvious the window has closed. Ford raised $23.5 billion in December 2006 against a recession nobody had called, pledging plants, subsidiaries and the trademark, and was the only Detroit automaker to reach 2010 without a bankruptcy court. The second half of the lesson is quieter: the family owner who could not have made that call recruited someone who could, and then actually got out of the way.

Key data

• $12.6B 2006 net loss
• negative $3.5B Stockholders' equity, Dec 31 2006
• $23.5B Raised, December 2006
• ~$46B Automotive liquidity, year-end 2006
• $10.1B Drawn on the revolver, Feb 3 2009
• $10.1B principal Automotive debt retired in 2009
• $2.7B 2009 net income
• May 22, 2012 Collateral released

Sources & basis

The company here is real and named, and nothing about it was invented to make the story land. The list below is where each fact came from — public filings, court records, published reporting — so you can open a source and check it against the sentence that used it.

1. Ford Motor Company, Form 8-K filed September 5, 2006, Exhibit 99 — the press release naming Alan Mulally president and CEO and Bill Ford executive chairman View source ↗
2. Ford Motor Company, Form 8-K filed November 27, 2006, Exhibit 99 — “Ford Announces Plans for Debt Financing,” including the collateral description and the $6.3 billion of unsecured facilities replaced View source ↗
3. Ford Motor Company, FY2006 Form 10-K — the $23.5 billion of December 2006 liquidity, Note 15 on the Credit Agreement and its collateral (“certain domestic intellectual property, including trademarks”), the $12.6 billion net loss, negative stockholders' equity, and the fourth-quarter 2006 rating actions View source ↗
4. Ford Motor Company, FY2009 Form 10-K — the February 3, 2009 revolver draw, the $10.1 billion debt reduction, the DOE ATVM loan agreement of up to $5.9 billion, and 2009 net income of $2.7 billion View source ↗
5. Ford Motor Company, Form 8-K dated May 22, 2012 — Moody's upgrade to Baa3 that day, “following similar action taken by Fitch, Inc. on April 24, 2012,” two of the three major agencies now at investment grade, and the resulting automatic release of the collateral View source ↗
6. Ford Motor Company, FY2012 Form 10-K — the collateral release and the $9.3 billion revolving facility that was the only remaining piece of the Credit Agreement View source ↗