Joining GM, Ford Will Make Early Debt Repayments

Light vehicles sales in the US do not seem to be improving much. The market for 2009 will probably produce about 10.5 million sales well down from over 16 million four years ago. Monthly comparisons from 2008 are still running negative for most car companies.

It is a surprise that GM has started paying the federal government back the loans it received early this year. It sent the US Treasury $1 billion on December 18 and another $192 million went to the Canadian government. GM management expects to be able to pay off its entire $6.7 billion obligation to the two governments by June.

Ford (NYSE:F) said it would also begin to pay bondholders early.

Ford borrowed $23 billion less than two years ago to prepare for a restructuring that included firing tens of thousands of workers and retooling its plants. CEO Alan Mulally mortgaged all the company’s assets to get the capital. Ford’s total debt rose to $27 billion. The firm says it has paid $10 billion of that back this year. Ford would like to pay back most of the balance by the end of 2011. The company expects to be profitable that year.

The wonder of the Ford and GM announcements is where the money is coming from. In GM’s case, its sales in China are booming. Units shipped in China in November by GM were larger than the US number. But, Ford does not have significant operations in the world’s most populous nation.

The answer to the question of where the cash flow is coming from to bring down debt may be in the massive cost cuts that each of The  Big Three made in 2008 and early 2009. The breakeven point against total sales for the car firms may now be so low that Detroit can make money on even the most modest revenue.

Detroit will never return to the sales levels of 2003 through 2005, but Ford, GM, and Chrysler are likely to survive. A lot of experts bet against that just a year ago.

Douglas A. McIntrye