Ford Motor Credit has for years offered a way for retail investors to invest in the bonds of Ford. It is a not a money market account, and not FDIC insured. Thus, it has offered a premium interest rate as compared to the Fed and other financial institutions.
Our last detailed commentary on this investment was in September 2007, which you can find here. Please read that blog for more specifics on this type of account. Since that time, interest rates have fallen significantly. Ford Investor Advantage still offers top tier interest rates with interest rates from 3.45% to 3.75% APR (3.51% to 3.82% APY). It functions essentially like a checking account, with free checks and no fees for checks written in excess of $250. You can withdrawal money at any time and as frequently as you would like (unlike traditional money market accounts). However, given the recent demise of the US auto industry, the money placed there is at greater risk than ever before.
Since 2007, the auto industry has essentially imploded with the global financial meltdown and recession/depression. GM (NYSE: GM) and Chrysler teeter on the brink of bankruptcy (I personally would not touch GM stock at all). Ford has done relatively better. Thanks to its plan to mortgage the company for $26 billion in 2006, it has a monetary cushion to prevent it from bankruptcy…for now.
In addition, it recently was able to refinance its debt. The company retired $9.9 billion of its securities in exchange for cash and shares under terms of the debt buybacks. It was able to reduce its debt 38% and save over $500 million in interest costs annually. The company now has about $15.9 billion in debts outstanding. Ford said it would pay a total of $2.4 billion and issue 468 million shares as a result of the offers. About $4.3 billion in Ford’s senior convertible notes were tendered under an offer that expired Friday. Up to $344 million will be used to pay cash premiums to note holders.
Ford Motor Credit also participated in this transaction in a separate offer. It will use $1.1 billion to purchase the secured term loan debt ($3.4 billion were tendered). Ford Motor Credit previously said a second cash tender offer that expired on March 23 was “over-subscribed,” and it doubled the amount of cash it would spend to buy back the debt. That resulted in the use of $1 billion to purchase $2.2 billion in term loan debt.
So what should investors in the Ford Investor Advantage program take away from all the recent news? The tender offer leaves the company with a better financial footing, although it is certainly not out of the woods yet, and depends entirely on how car sales will improve this year and next. I certainly would not leave my entire savings/nest egg with Ford, and would consider other high yielding options such as GE Interest Plus (which pays 2.73%-3.03% depending on your investment size). GMAC also offers FDIC-insured CDs with a one year return of 2.75% APY. Bank CDs are also quite attractive these days. Without this tender offer, I would have been quite cautious about placing more money with Ford Investor Advantage. In fact, I would have advocated pulling some money out of it given the possibility of bankruptcy. However, given the extra lifeline it now has, I think leaving existing cash within this account is possible. However, I would still not risk an entire nest egg with an account at Ford.