Ford's restructuring may not be enough

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Ford (F) announced an arrangement to retire 40% of its debt. Of course, the companies holding the debt may not go along. There may not be enough incentive in what Ford is offering.

According toThe New York Times, "Ford said that the debt eligible for its restructuring consisted of $4.9 billion in convertible notes, $6.9 billion in term loans and $8.9 billion in other debt." Each group will get a modest financial incentives to convert debt to common shares.

The debt-holders have to make a fairly simple decision. Do they want Ford common stock, which will be diluted by the conversions, or do they want to burden the company with financial obligations it may not be able to pay? The "not be able to pay" part is the crucial issue. Ford's sales may be bad enough that it will have to default on debt.

The answer to the puzzle may be that it does not matter. If Ford continues to loss 45% of its domestic sales, it will likely need additional capital before the end of the year. The federal government is probably the only source of that. Both creditors and common shareholders may have to take a haircut in the process. In that case, the conversion of debt to equity may be academic.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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