Ford's bond cost adds $600 to car price, Lehman says

October 11, 2002 Dearborn, Mich. Bloomberg News reported that Ford Motor Co. has almost a $600 per model cost disadvantage to rival General Motors Corp. because of higher borrowing costs and that gap may widen next year, a Lehman Brothers Holdings Inc. analyst said.

Ford Motor Credit Co.'s average borrowing costs were 90 basis points higher than General Motors' in the second quarter, and 100 basis points equals about $600 in additional costs per vehicle for Ford, Lehman analyst Darren Kimball wrote in a report. A basis point is 0.01 of a percentage point.

"Fears about a liquidity crunch in Ford's credit subsidiary are taking on a life of their own," Kimball, who rates the shares "underweight/negative," wrote. "In our opinion, these fears are not legitimate, as we do not foresee a liquidity crisis for Ford Credit."

Ford last year lost $5.45 billion and in January said it will cut costs, close plants and create new models to generate a pretax profit of $7 billion annually by 2005. In May, Ford tripled the number of engineers to 1,000 assigned to cut as much as $700 in annual costs per vehicle by 2005.

"Our debt levels are very manageable," said Dan Jarvis, a spokesman for Ford's consumer-credit unit. "Stock prices and bond spreads are not an accurate perception of our business."

Ford is the biggest contributor to the Lehman Credit Index, a benchmark for many bond fund managers, and has about $127 billion in bonds, according to Bloomberg data. The automaker's finance arm is responsible for three of the 10 biggest debt sales ever in the U.S. corporate bond market.

Ford's 7.25 percent coupon notes maturing in 2011 were little changed at about 86 cents on the dollar. The yield was 9.6 percent, a 601-point premium to Treasury yields. That's more than double the yield spread three months ago.

Ford's costs may rise 50 to 75 basis points next year, Kimball wrote. The analyst couldn't immediately be reached for additional comment.

General Motors' 6 7/8 percent coupon bonds due in 2012 are trading at about 89 cents on the dollar, yielding 8.55 percent for a spread of 490 basis points. GMAC sold the debt in late August at a spread of 265 basis points.

Ford's shares have lost 51 percent of their value this year and this week hit their lowest price in a decade. Ford rose 45 cents to $7.60 at 4:01 p.m. in New York Stock Exchange composite trading.