Reference no: EM133290995

Ford Motor Co. on Thursday said it would buy back up to $5 billion in high-priced debt, a move that comes as finance chief John Lawler works to overhaul the car maker's balance sheet and improve its credit rating.

Ford's tender offer is for 10 different debt instruments including securities with a 9% coupon due in April 2025 and those with a 9.625% coupon due in April 2030. The company in April 2020 sold $8 billion of bonds as a financial cushion as the coronavirus pandemic forced Ford's factories to close temporarily and dented sales. Ford also eliminated its dividend at the time.

Buying back the debt with cash from its operations would help the auto manufacturer bring down its interest costs and reduce its debt levels. Ford said it expects to incur a charge in the range of $1 billion to $1.2 billion depending on which securities are bought back.

"We can have the flexibility now to rework our debt structure," Mr. Lawler said, adding that Ford expects the tender offer to have a significant impact on its cost of debt. "We are continuing to look at how we strengthen the balance sheet...with the idea that it's going to provide us increased financial flexibility as well as it's part of returning our credit rating back to investment grade," he said.

Ford's senior unsecured debt is rated Ba2 by Moody's, which is two notches below investment-grade status. S&P Global Ratings rates some of the company's debt as BB+, which is one notch below investment-grade status, with a negative outlook.

Ford and its financing subsidiary Ford Motor Credit Co. on Thursday also launched a sustainable-financing framework that will serve as the basis for issuances of both secured and unsecured financing tools, including bonds tied to the company's environmental, social and governance goals like clean transportation and clean manufacturing. The auto maker said it wants to be carbon neutral no later than 2050.

"You could potentially see a green bond issuance, which we believe will be healthy for the company and...improve our balance sheet, lower our debt, and lower the cost of our debt considerably," Mr. Lawler said.

The company earlier this year sold a 0% convertible bond, taking advantage of the increase in its share price since the beginning of the year. Its stock price-at $19.38 in recent trading-has more than doubled since early January.

Ford last month said it would reinstate its dividend in the fourth quarter, pledging to distribute 10 cents a share as of Dec. 1.

Thursday's tender offer "is a very strong signal, in addition to the reinstated dividend, that the balance sheet is being repaired fast," said Philippe Houchois, a managing director at investment bank Jefferies Group.

Extinguishing its higher-priced debt could provide Ford with about $455 million in additional pretax income a year, said David Whiston, an equity analyst at Morningstar Research Services LLC.

"I like them deploying their cash hoard to take out a decent part of their most expensive bonds," Mr. Whiston said. "It's a good use of cash right now, and with the dividend coming back they can do it without being criticized for not resuming the payout."

Question:

Analyze based on WHY they have made the decisions they have made- both at the start of the pandemic and now; and what this tells us about the strategy of structuring a Balance Sheet.