Electric year
If Ford Motor becomes the US market leader in electric vehicles and ESG financing, it may look back on 2021 as the year the rubber started to meet the road. For funding a major EV push, while cutting costs and attracting the greenest of capital, Ford is IFR’s Corporate Issuer of the Year.
The pandemic economy was not particularly kind to automakers. A scarcity of semiconductors, fluctuating demand and temporary factory closures contributed to huge market cap and revenue losses all round. A recharged focus on the environmental and social effects of capitalism also made the notoriously high-emitting sector out of bounds for many green-conscious investors.
So industry bellwether Ford Motor had its work cut out in 2021. Under new CEO Jim Farley the iconic US company contended with costly Covid-era burdens like the chip shortage, a lowered credit rating and high-interest debt while also trying to remake itself from boot to bonnet as a leader among incumbent American carmakers in the high-tech, environmentally friendly electric vehicle market.
The biggest fruit of Ford’s multi-front effort in 2021 is well-known to anyone in the auto industry. In September, it announced US$11.4bn of planned electric vehicle investments, including truck and battery plants in Tennessee and Kentucky, that are expected to bring thousands of jobs to a region beset by unemployment in the wake of the collapse of the coal industry.
Less obvious was the financial ingenuity – on top of the EV know-how – that allowed Ford to maintain liquidity throughout the pandemic and start to fund this big market-moving investment, which, importantly, is part of a broader US$30bn push into these new technologies.
As Ford was communicating to the market its plans for electrifying its marquee Mustang and F-150 brands, it was also working on a series of crucial financings and manoeuvres including a zero-coupon convertible, its first sustainability-linked loan and first green bond, the biggest such deal by a US company ever.
“For us, we had to let our progress on electrification get to the point where it made sense,” said Ryan Hershberger, director, global funding and capital markets, at Ford Motor. “And with the announcements we made [in 2021] on our significant investments into electrification, the timing was right for us to get involved and help accelerate that transformation.”
New convertible
Timing was also important for Ford’s first major financing of the year – the US$2bn five-year zero-coupon convertible it completed in March to pay down debt.
Ford saw a key opportunity for a convertible at the beginning of the year, as its share price soared after getting hammered during the pandemic. By the start of 2021, its shares were already more than double the pandemic low of less than US$4. Then better-than-expected earnings and a February announcement that it was almost doubling its EV investments helped further goose the stock above US$13, a level it hadn’t hit in years.
Ford and its underwriters Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan read the market correctly and locked in zero-percent funding with stock dilution offset to a 40% premium.
Sustainability
In September, Ford announced another big deal, this time a pioneering loan. It completed a US$15.5bn three-part revolver that was among the first and biggest to use SOFR, the Libor alternative recommended by the Federal Reserve-backed Alternative Reference Rates Committee. The deal is IFR's North America Loan of the Year.
The automaker started to signal to the loan market in June that it was switching from Libor-linked issuance. At the time, bankers suggested the strength of the issuer would overcome concerns about the potentially tricky implementation of daily SOFR.
That assumption was validated many times over: 60 banks ultimately participated in the financing.
The loan is also the largest ESG facility ever to be completed in the US market. The inclusion of environmental targets related to Ford’s reduction of greenhouse gas emissions, its use of renewable energy, and the lowering of emissions from its passenger vehicles in Europe set a high bar for its competitors to match.
“We’re all accountable for creating a constantly safer and cleaner organisation that sets an example for sustainability,” said Dave Webb, the company’s treasurer.
Ford was the first US automotive manufacturer to issue a sustainability-linked loan and was an early adopter of Scope 3 emissions targets – relating to emissions that are an indirect consequence of the company, such as emissions from suppliers or customers.
Achievement of each sustainability-linked target could reduce the margins and facility fees Ford pays on the loan. JP Morgan led the transaction with Credit Agricole as lead sustainability structuring agent.
"Ford really is a landmark transaction on many levels because it does validate the legitimacy of the sustainability feature on a global level,” said Fanny Charrier, loan syndications and sustainable finance coordinator at Credit Agricole. “It is the largest ever sustainability financing, but also it's in the US where the market has been slower for sustainability-related deals."
The financing comprises a US$3.4bn three-year revolving credit facility, a US$10.1bn five-year RCF and a US$2bn three-year RCF. The relationship bank group was expanded to include Black, Hispanic, women and military veteran-owned financial institutions, further highlighting Ford’s commitment to diversity.
“It's a company that talks to absolutely all Americans and when you talk about sustainability, when you want people to join the fight for climate change, when Ford takes a stance, people listen,” Charrier said.
‘Dark green’
That’s at least part of the reason Ford aimed high when it sought to do a US$2.5bn green bond later in the year – in a market that closely scrutinises issuers from high-emission sectors like the car industry.
Proceeds from the financing are earmarked for projects related to EVs and batteries.
“We wanted our inaugural green bond to be beyond reproach,” Hershberger said. “It was important that our transaction met the highest possible standards and that on an investor and rating agency scale it was dark green.”
Of course, EV enthusiasts might have easily overlooked Ford’s green bond when it hit the market during the second week of November. That week, the 118-year-old carmaker vied for market attention with upstart Rivian Automotive, whose shares started trading that Wednesday after the company priced the year’s biggest IPO, and Elon Musk, who sold about US$5bn of Tesla shares after soliciting advice on the disposal on Twitter.
Ford, nonetheless, didn’t miss a step with bond investors. After the Dearborn, Michigan-based company hit the market on November 8 with the Ba2/BB+/BB+ rated senior note, it was able to tighten the yield from initial price thoughts of 3.625% area to final pricing at 3.25% – an outcome one portfolio manager described as a “blowout”.
What's more, the week before the green bond hit the market, Ford announced a US$5bn cash tender offer for expensive outstanding bonds, including the especially costly debt it priced during 2020.
The tender, intended to be financed with Ford’s US$30bn-plus cash hoard, came with a condition that illustrated the importance of EVs. If the green bond didn’t happen, Ford would use cash on hand to fund the relevant green projects and possibly reduce or cancel the tender. Thus, Ford communicated to the market its priorities – green investment was more important than paying down expensive debt.
It was not really a surprise when Ford was able to build up US$10bn in orders quickly for the green bond, in part because it had clearly communicated to the market its intentions with the bond and its EV plans. Among other things, investors said they were impressed by Ford’s initial successes in electrifying the F-150 truck, for many years America’s best-selling vehicle.
“The inaugural transaction supports the design, development and manufacture of our electrified vehicle portfolio, including the Mustang Mach-E, the F-150 Lightning and additional electrified vehicles that haven’t been announced yet,” Hershberger said. “We have only included spending in areas that will create the greatest environmental impact.”
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