Tuesday, June 27, 2006

Ford rated more likely to default than GM

Ford rated more likely to default than GM
By Richard Beales in New York,Bernard Simon in Toronto andJames Mackintosh in ViennaBy Richard Beales in New York, Bernard Simon in Toronto and James Mackintosh in Vienna

Updated: 11:12 p.m. ET June 22, 2006
Ford is overtaking General Motors as the US car company causing most concern to investors and is seen as the most likely to default on its debts, according to the credit markets.

Judging by the cost of default insurance, Ford is seen for the first time in recent years as the more likely of the two to default on its debts. The companies' shares have also moved in opposite directions in recent months.

The switch centres on concerns about the viability of Ford's Way Forward plan, which aims to return its North American operations to profit by 2008. Analysts and others have doubts about Ford's ability to staunch recent losses in market share and have questioned the quality of management at the family-controlled carmaker.

The annual cost of five-year protection against a Ford default climbed to 9.39 per cent on Wednesday, according to data and valuation group Markit, while the cost of equivalent protection for GM stood at 9.26 per cent. A trader said the costs were about equal yesterday.

Default protection rates for GM in the credit default swap market had jumped to more than 13 per cent in January.

The cost of default insurance for Ford has been more stable at 8 to 10 per cent over the past six months, but the rate has risen markedly in recent weeks.

GM's stock price has risen by 42 per cent since the start of the year as fears have subsided that the world's biggest carmaker was on the verge of filing for bankruptcy protection. On the other hand, Ford stock touched a 52-week low of $6.38 this week.

Rating agencies have cut debt ratings on both companies deep into junk territory in the past year, reflecting concerns about their shrinking market shares and high healthcare and other labour costs.

GM's share of the US market fell to 22.5 per cent in May, its lowest level in decades, while Ford's dropped to 17.5 per cent, compared with about 25 per cent in the 1990s.

Each GM and Ford vehicle has a cost disadvantage of more than $1,000 compared with Japanese models.

At the current cost of default protection, market traders are still implying a greater-than-even chance of bankruptcy for both carmakers within five years.

GM, which is about a third bigger than Ford, has racked up the larger financial losses in recent years. But Stefano Aversa, managing director of Alix Partners, a restructuring consultancy, said: "Ford started [its recovery plan] a little bit later, they have been a little bit slower and a little bit less transparent.''

Both carmakers are in the process of cutting a total of 60,000 jobs as part of drastic cost reduction programmes.

Another automotive consultant questioned Ford's stomach for tough cost-cutting decisions, noting that the company had yet to identify all the plants to close under its recovery plan.

Copyright The Financial Times Ltd. All rights reserved.


Post a Comment

<< Home