Ford Motor Company has pushed back bankruptcy by piling on high-interest junk-rated debt. Robinhood traders buying the stock will suffer.
Despite reporting better than expected earnings last week, Ford Motor Company (NYSE:F) has continued its long-term downtrend.
Ford reported an adjusted operating loss of $1.9 billion in the second quarter, much better than the $5 billion loss expected.
The stock’s short-lived rally before the results got sold after earnings came out.
Meanwhile, keen buying interest from Robinhood traders has propelled Ford to the top of the highest traded stocks on the platform.
Ford has reported a war chest of cash and marketable securities at $39.3 billion, which might seem pretty decent, but there is a lot more to it than meets the eye.
There is a real possibility that Robinhood traders might be left holding the bag when Ford goes under, and here’s why.
Ford Motor Company’s newly acquired cash hoard is twice its minimum cash balance target of $20 billion. However, most of it is a high-interest debt that Ford secured to survive the pandemic.
Back in 2006, then-CEO Alan Mullaly managed to secure $23.6 billion in debt, which helped the company escape bankruptcy. Eventually, Ford escaped by the skin of its teeth by borrowing another $5.9 billion in 2009. The massive obligation still haunts the company to this day.
The fact that Ford Motor Company, a multibillion-dollar company, finds it necessary to defer loan payments of that size is concerning.
Indeed, those are small payments compared to the colossal amounts Ford has racked up so far this year.
This debt will get more expensive, and raising more money will prove difficult as Ford’s credit rating continues to sink.
The enormous junk-rated debt is a ticking time bomb.
Ford has a negative cash flow of $5.9 billion, and its reported sales have dropped significantly because of the coronavirus-induced shutdown.
After shutting down entirely in March, Ford had just got back to pre-COVID-19 production levels. Now, it looks like another shutdown could be right around the corner.
Robinhood traders who are loading up on the stock might believe Ford will muster a miraculous turnaround. But if Ford keeps making terrible decisions like the Bronco relaunch, it might never materialize.
The question remains: Will Ford be able to raise enough junk-rated high-interest debt until then?
Watch: Is Ford Going Bankrupt?
Ford expects big things from the Mustang Mach-E, new F-150, and the new Bronco, but the ongoing recession will weigh on sales, and lockdown 2.0 will take a toll on production capacity.
The debt bomb is ticking for Ford. When it goes off, it will take down new investors who have faith in the company.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
Last modified: September 23, 2020 2:10 PM