Could Ford be next?

From the moment it became clear that the auto industry was in a state of financial crisis last year, the focus has been on GM and Chrysler. Ford has not needed government aid so far, nor has it needed to declare bankruptcy. Indeed, some have praised Ford for its forward-thinking ways in managing to avoid the same fate as their competitors. But that has always seemed rather short sighted to me because the only way Ford has avoided those same problems was by mortgaging virtually all of their assets before the credit market problems became acute, thus building up a large cash fund with which to sustain the downturn but also building up a huge debt load in the process. The Detroit Free Press addressed that problem in an article on Sunday.

Today, Ford has $25.8 billion in automotive debt — much of which was accumulated to raise cash so the company could survive the economic downturn that it correctly forecast several years ago…

What’s more, Ford’s debt level could reach $36 billion by 2011, when Ford expects to be profitable again, Citibank analyst Itay Michaeli said in an interview with the Free Press.

That is about four times more than Ford’s expected earnings. Healthy automotive companies usually carry about twice as much debt as earnings, he said.

While Ford has avoided the more serious problems of its competitors so far, it may well have done so only by kicking the can down the road. That’s not necessarily a bad idea if, by the time they catch up to the can, global auto sales have rebounded and the company is turning a healthy profit again. But if sales continue to lag, if American auto sales don’t go back up to at least 13 million vehicles per year, by the time they catch up to the can they may end up in even worse shape.

In 2006, Ford essentially took out a second mortgage, a $23.5 billion line of credit that has allowed them to survive so far through the economic downturn. But that debt starts coming due in 2011, with a payment of $10.1 billion due then. If sales are still low, it’s nearly inconceivable how they could make that payment. Meanwhile, GM and Chrysler have shed much of their outstanding debt vai bankruptcy and have emerged with a plan to be profitable even if American auto sales stay around the 10 million per year mark.

Don’t be surprised if two years from now the situation flips upside down and it’s Ford that finds itself in bankruptcy court while GM and Chrysler are praised for their forward thinking ways.