One of Ford's Engines Is Humming, Anyway

But can its finance division keep up a stellar profit recovery?

Since late 2001, William C. Ford Jr. has been struggling to overhaul the ailing auto maker his great-grandfather founded 100 years ago just last month. If only it were as easy as the lightning-fast turnaround at Ford Motor Co.'s finance arm.

After all, it was only 18 months ago that Ford Motor Credit (F ) Co. was a basket case. Now, under a new leader who took charge in December, 2001, the world's largest auto-finance company is once again Ford's cash cow. Its profit zoomed to $442 million in the first quarter, up 73% from a year earlier, although its results for the rest of the year are expected to be more modest. And after needing a $700 million capital infusion from its parent in January of last year, the finance arm paid Ford Motor a $1 billion dividend in March. Ford Credit, said Goldman, Sachs & Co. analyst Gary Lapidus in a recent report, "is running on nine of eight cylinders."

Credit one of Ford's quintessential company men, Greg C. Smith, for this turnaround. The 51-year-old has been with Ford for 30 years, 21 of them in engineering, planning, and marketing jobs before joining Ford Credit in 1994. Upon taking over, he immediately went to work tightening lending policies and making loan servicing and collections more efficient. Having abandoned a grandiose late-'90s scheme to become a global auto-finance superpower, Ford Credit has exited riskier businesses such as lending to used-car buyers and borrowers with poor credit, and focused instead on loans for buyers of Ford Motor's cars and trucks.

Smith's moves have left Ford Credit better prepared in the event its parent suffers a credit downgrade. Ford Motor's Standard & Poor's rating hovers at BBB, two notches above junk grade. S&P has said it might downgrade the company if it becomes clear that Ford won't break even on its pretax auto sales this year; Ford Credit's rating likely would be lowered as well. Says Ford Credit Chief Financial Officer David Cosper: "Being hitched to a cyclical company is going to affect your ratings."

Nevertheless, a downgrade wouldn't spell the disaster for Ford Credit that it would have in the past. That's because the outfit no longer depends on the ratings-sensitive market for unsecured commercial paper to raise most of the money it lends. Since 2000, the unit has reduced its commercial-paper exposure from $42 billion to $8 billion, relying instead on much cheaper funding: the sale of securitized packages of car loans, which are rated AAA. Ford Credit increased securitization from $25 billion, or 13% of its total funding in 2000, to $55 billion, or 28%, by early this year.

Overall, Ford Credit's balance sheet is shrinking as it implements its lower-risk strategy. The pool of loans that it manages is expected to drop from $208 billion at the end of 2001 to $180 billion to $185 billion by the end of this year. "We have put the brakes on the business," says Cosper. That smaller portfolio is better managed and suffers fewer losses, boosting profits. Credit losses in the first quarter totaled $493 million, down from $912 million in the final quarter of 2001.

Certainly, Ford Credit isn't out of the woods yet. Unemployment and personal bankruptcies continue to rise, leading to more auto-loan defaults and repossessions. Plunging used-car prices -- down about 10% in the past year -- mean that repossessed cars and those returning to the credit arm at the end of their leases are worth less. In fact, Ford Credit executives caution that results for the second quarter (due July 16) and subsequent quarters probably won't be as strong as the first quarter's. That's partly because the company decided that the timing was right in the first quarter to do the bulk of this year's securitization, in effect front-loading a big chunk of 2003 profits. Even so, if Ford Credit continues on its current track, it's likely to remain the pacesetter in Bill Ford's revival effort.

By Kathleen Kerwin in Detroit

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