Ford uses bond sale to finance contributions, derisking plan
By Barry B. Burr | January 7, 2013 12:01 am
Ford Motor Co., Dearborn, Mich., sold $2 billion in 4.75% 30-year notes Jan. 3, mostly to finance accelerated contributions to its worldwide defined benefit pension plans this year and continue derisking its pension obligations, said Neil Schloss, vice president and treasurer.
With the $1.93 billion in net proceeds from the notes sale, Ford plans to redeem $592 million in outstanding high-cost 7.5% notes, issued in 2003, leaving $1.33 billion predominantly for funding pension contributions, Mr. Schloss said in an interview Jan. 4.
The notes were priced to yield 180 basis points over Treasury securities of comparable maturity, he said.
Mr. Schloss declined to say how much Ford expects to contribute to its pension plans this year, saying that information could be disclosed with the company's earnings announcement near the end of this month.
“To be able to issue a 30-year bond for Ford, as a triple-B rated entity below 5% is pretty good,” Mr. Schloss said. “Rates are at historic lows. Credit spreads continue to improve. The market demand for (long) duration) … is very significant.”
Ford took advantage of the market to issue the debt, to put more money in its pension plan and improve its corporate balance sheet, Mr. Schloss said.
The company doesn't plan other debt issues, he added.
Under pension regulations, Ford has no required contributions in 2013 and had none in 2012, according to the company's latest 10-Q report, filed Nov. 2.
Even though no contribution was required for 2012, Ford expected to make a total of $3.4 billion in contributions to its worldwide funded pension plans, according to the 10-Q. That total includes $2.5 billion that Ford contributed to its worldwide plans, including $1.5 billion in discretionary contributions to its U.S. plans, in the first nine months of last year. In the last three months of 2012, Ford expected to contribute $900 million to its worldwide plans, including $500 million to its U.S. plans. An update of the amount contributed in 2012 wasn't available.
Ford's U.S. pension plans had a combined $39.4 billion in assets and $48.8 billion in liabilities for an 81% funding ratio, while its non-U.S. plans had $19.1 billion in assets and $25.1 billion in liabilities for a 76% funding ratio. The pension plan values are as of Dec. 31, 2011, according to its 10-K filing. Mr. Schloss said updated assets and liabilities figures won't be available until the company files its 10-K.
Ford sharply turned its U.S. pension fund target asset allocation to lower risk by moving to a liability-driven investment strategy. It plans to shift to 80% fixed income and 20% growth-seeking assets of equities and alternatives over the next few years, Mr. Schloss said.
The pension plans were at 52.3% fixed income and 31.4% equity, 7% hedge funds, 4.9% private equity, 3.5% cash and 0.9% real estate as of Dec. 31, 2011, which Mr. Schloss said is the latest figure Ford would disclose until it releases its 10-K.
“We're a little more fixed income … now,” Mr. Schloss said, declining to give a percentage. “We're continuing on that path to 80/20.”
Ford does all the strategy work internally for its investment allocation and liability-driven investing and then “we have outside managers who implement it,” Mr. Schloss said.
All Ford's assets are externally managed, and most of its assets are actively managed.
“We don't have an LDI manager,” Mr. Schloss said. “We'll have specific mandates with specific firms to implement the strategy.”
Ford doesn't use investment consultants to assist, although it uses actuarial firms to help with the data on liability values and scenario planning, he said.
“We have shied away from consultants,” Mr. Schloss said. “This is our obligation. We have to be responsible for it.”
“We are constantly evolving our manager lineup to reflect the strategy,” Mr. Schloss said. “As we head toward more fixed income, we will likely need to add fixed-income managers. The offset of that is equity managers. As we reduce equity allocation, we either have to reduce the number of managers or reduce the size of their mandates. The same could be said for fixed income. We can grow the mandates or hire new. So we are constantly evolving.”
“We're constantly doing searches for most of our asset classes so we have the lineup ready to the extent we need to make changes,” Mr. Schloss said.
Ford does plan to raise its real estate allocation, although Mr. Schloss declined to give a figure. “It is clearly growing from” the current 0.9% allocation.
Real estate “is not only a growth asset but it also has characteristics similar to a fixed-income portfolio from the standpoint of interest rates. … It does help from a hedging perspective of the overall (pension) liability and ability to get excess returns.”
Ford classifies real estate and some of its hedge funds as in the middle between assets to hedge liabilities and return-seeking assets to grow the pension fund, Mr. Schloss said.
“Our timing is pretty good” on real estate, Mr. Schloss said. “We've been able to get some of the rebound” from the real estate decline.
In terms of the challenges in moving more to fixed income when the interest-rate environment is low, Mr. Schloss said, “The liability is very much tied to where interest rates are. So as we move down the path toward more fixed income, the impact on the liabilities and impact on assets are going to be similar.”
“As you get closer to fully funded, you mirror the impact of the interest rate changes on liabilities through your assets,” Mr. Schloss said.
“You're not just buying 30-day Treasuries. You're buying long-duration governments, long-duration corporates … mortgages, real estate. There are other asset classes that do generate significant returns.”
The move to fixed income is part of Ford's objective to minimize the volatility of the value of its U.S. pension assets relative to its U.S. pension liabilities — while at the same time ensuring sufficient assets to pay plan benefits.
Ford's U.K. and Canadian plans, its largest non-U.S. plans, have similar investment objectives to the U.S. plans and expect to reach similar new target allocations over the next several years, according to the 10-K. Before the change, the U.K. and Canadian plans' target asset allocations were 45% fixed income, 30% public equity and 25% alternatives.
“The whole derisking strategy at Ford has many, many facets,” Mr. Schloss said. “The goal is not to let any one of them drive the strategy … to get the pension fund where we want it to get” toward fully funded.
As part of its derisking strategy, Ford announced April 27 it would offer a voluntary lump-sum defined benefit plan payment to about 90,000 U.S. salaried retirees and former employees. That offer continues through most of this year, Mr. Schloss said in the interview, adding Ford plans to disclose the preliminary impact with its earnings release.
Ford's 10-year annualized return on pension assets was 8.6% for the U.S. plans, 6% for its U.K. plans and 4.6% for its Canadian plans, as of Dec. 31, 2011. Its assumed long-term rate of return on assets at year-end 2011 was 7.5% for the U.S. plans, 7.25% for the U.K. plans and 7% for the Canadian plans.