Last year, Ford reduced its total debt by some $14.5 billion in order to improve its balance sheet and operations. That plan looks set to continue, as the company just announced it is continuing to reduce its debt by another $3 billion through converting preferred securities.
“We remain focused on reducing [Ford’s] debt as the core automotive business continues to strengthen,” said Lewis Booth, Ford’s executive vice president and CFO. “We are pleased with the progress we have made, and we are committed to continuing to improve our balance sheet to lay a solid foundation for a strong and profitably growing business in years to come.”
Unlike the debt reductions last year, which were paid to the United Auto Workers Union and independent lenders, the $3.0 billion in preferred securities are held by Ford Motor Company’s own subsidiary trust, Ford Motor Company Capital Trust II.
A quick refresh on Ford Motor Company Capital Trust II: In 2001, when Ford was facing financial trouble, it formed FMCCT II as a subsidiary business trust based in Delaware. Ford floated the trust on the New York Stock Exchange at a price of $50 per share, which was then used to loan Ford some $5.2 billion in the form of convertible debentures; convertible debentures are simply a loan that can be converted into common stock rather than paid in cash.
The debt was originally due in full by January 15, 2032, but Ford Motor Company announced today it will alleviate the remaining $2.898 billion early. Rather than eliminating the debt by paying cash, preferred security holders can redeem 2.88 shares of Ford common stock for each of the preferred trust security – as per the convertible debentures originally issued. Security holders have until the closing bell on March 14 of this year to do so. After that, Ford will buy each security trust back for roughly $50.87 – FMCCT II is currently trading at $51.06 after falling more than $2.00 following Ford’s announcement.
According to Ford, this roughly $3.0 billion debt reduction will lead to a $160 million reduction in annual interest payments. It will also, however, lead to a $60 million charge – in addition to the $3.0 billion – in the first quarter of 2011. After completing the conversion of the preferred securities, Ford’s total debt will be approximately $16.1 billion.