Here’s Why High Interest Loans Will Bankrupt Ford

  • Ford has raised $8 billion in high-interest debt to help it survive the coronavirus crisis.
  • The company’s recent credit downgrade has become a self-fulfilling prophecy. The high interest rates make it harder for Ford to meet its obligations.
  • With cash flow deteriorating in every automotive segment, Ford is one step closer to bankruptcy.

Ford Motor (NYSE: F) is working hard to keep itself afloat amid the coronavirus pandemic. But some of the company’s strategies may end up doing more harm than good over the long term. Despite recently being downgraded to junk status, Ford’s management has decided to take out $8 billion in loans with interest rates over 9%.

This comes at a time when the automaker expects to see revenue and cash flow drop dramatically due to global lockdowns and impending recession. The new junk loans will damage Ford’s balance sheet and further strain the company’s cash flow with high interest rates. Paradoxically, these loans could end up taking the company closer to bankruptcy over the long-term.

Ford stock has dramatically underperformed the S&P 500 over fears over its ability to survive a recession. | Data by ycharts.

Ford Became a ‘Luxury’ Automaker Right Before Recession

As part of its disastrous restructuring program, Ford has decided to axe most of its low-priced sedans in favor of higher-margin trucks, SUVs and sports-cars like the Mustang. This strategy was designed to boost the automaker’s profitability in the U.S. segment, but it may have made the company more vulnerable to the business cycle.

With people losing their jobs and getting their work hours cut amid the 2020 recession, auto buyers are less likely to purchase flashy sports cars like the Mustang or high-priced trucks and SUVs. But while the restructuring was a bad idea, Ford’s troubles started long-before the coronavirus plunged the global economy into a tailspin.

Ford’s China sales have been in free-fall for the last four years.

In 2017, Ford sold 1.2…

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