Two Roads: Why Ford Can't Get Enough Debt, While GM Won't Go Into Hock

As the financial crisis and the Detroit meltdown finally work their way through the economy, a critical choice has emerged for carmakers: Issue new debt -- or go debt free? Conveniently, Ford (F) and General Motors (GM) offer diametrically opposed view on this: Ford likes debt, while GM says it hates it.
GM's stance is more striking, given that prior to bankruptcy it was in hock to the tune of $45 billion, which cost it $2 billion annually in interest payments alone. This combined with the massive downturn in the auto industry was what ultimately drove the General into bailout and bankruptcy -- and necessitated a car czar in former investment banker Steven Rattner to beat back GM's enraged bondholders.

But what about Ford?
Ford, on the other hand, made it through the downturn without having to get an assist from the taxpayer -- but only because CEO Alan Mulally borrowed more than $20 billion before the credit crunch. Ford has reduced its debt over the past two years, but it still has to service more than twice as much as GM. Then again, Wall Street seems much more bullish on its prospects, having boosted its share price well above the sub-$2 realms it visited in 2009 (it's currently hovering around $15).

Ford Motor Credit is now confronting the prospect of issuing billions in new debt, ahead of an expected bond rating upgrade, according to Reuters. This makes sense, given they way that the car business has operated in the past. For what it's worth, Chrysler is also in the process of preparing to return to the bond markets when its rating is restored to investment-grade. But take that with a grain of salt -- Chrysler's finances are organized according to the high-wire act that CEO Sergio Marchionne is playing with Wall Street and the U.S. government ahead of an IPO.

GM breaks with tradition
By contrast, GM has declared that it wants to get a close as possible to operating debt-free. The company has about $5 billion of post-bankruptcy debt on in books, but former CFO Chris Liddell insisted before his departure earlier this year (more on that in a second) that GM was planning to aggressively retire even that modest liability.

Liddell, a Microsoft (MSFT) veteran, was seen as extremely forward-thinking in this respect, arguing that GM needed to put profits into new product development -- just like they do in the tech industry! Whether he kinda sorta lost that argument over GM's decision to move hard into the subprime lending game through the ramping up of its GM Financial arm is anybody's guess. Maybe he just wanted to be CEO and got passed over in favor of Dan Akerson. Regardless, GM Financial just recorded a 22% first quarter profit.
Why Ford can continue to bet the farm
Mulally, it has been pointed out, came from the airplane business (he was Boeing's CEO), where you go all-in with the next big passenger jet as a matter of course. When he took out the big loan before the downturn, he was applying the same strategy to Ford -- including a streamlining of the company's product lineup that he called "One Ford."

Right now, that bet is paying off, as Ford's core lineup is the best in the auto industry. The future looks bright, so Ford can continue to issue debt as if it were 2005 all over again.

GM, however, is only just beginning to get its product portfolio in fighting shape. But having suffered from too many bad vehicles and too many adrift brands in the past, it wants to maintain discipline in this area going forward. And it want to do it on the back of real sales, not debt.

The payoff
Mulally, or his successor, has a big management challenge ahead. Ford has regained the number two spot in the U.S., but it's only a matter of time before GM enters the sweet spot of its current product cycle. Ford is already there. If it faces any kind of sales decline in the next two years, its debt will become a problem. Then it may have to bet the farm again, while GM doesn't have to even think about it.

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Photos: Ford/GM Media

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