UAW trust cashes in Ford stock warrants, generating at least $1.3B for retiree health care

UAW trust fund to sell rights to rising Ford stock

DETROIT — After watching Ford Motor Co.’s stock climb to a five-year high, a United Auto Workers trust fund is cashing in, selling the rights to an 11 percent ownership stake in Ford to raise at least $1.3 billion for retiree health care.

More than 200,000 Ford retirees and their spouses depend on the trust fund for their health care coverage. While the trust could have waited to see if Ford’s shares climb higher, it would be yet another risk in an already turbulent industry. Some analysts say that even with the extra $1.3 billion, the trust is in danger of running out of cash.

The union-run trust began paying health care costs for Ford’s retired factory workers and their spouses in January after the company transferred to it cash and other assets valued at $14.8 billion. The fund will auction one of those assets, warrants to buy 362 million shares, starting Tuesday. Warrants, like stock options, give the holder a right to buy shares.

Ford’s shares dropped 29 cents, or 2 percent, to $13.57 in Monday afternoon trading. But after falling to as low as $1.26 in November 2008, Ford shares have grown more than 10 times in value as the company avoided bankruptcy protection and government aid, won accolades for its vehicle quality and reported a full-year profit for 2009.

On March 18, Ford’s shares hit an intraday price of $14.54, the highest level since January 2005.

Shelly Lombard, credit analyst at the New York bond research firm GimmeCredit, said the trust is wise to sell the warrants now.

“It just makes perfect financial sense to take some money off the table,” she said. “You never know what the market’s going to do.” She also notes the sale’s timing is good because one of Ford’s chief rivals, Toyota, is struggling.

The union also needs to diversify its portfolio away from auto shares to protect against another industry downturn, said J.B. Silvers, professor of health systems management at Case Western Reserve University. “Clearly you don’t want to have all your eggs in one basket,” he said.

While health care reform has only recently been at the forefront of national debate, the UAW and the auto industry made landmark changes for more than 1 million retirees three years ago.

Ford, General Motors Co. and Chrysler Group LLC all set up retiree health care trusts as part of their 2007 labor negotiations. The automakers wanted the trusts so that they could remove billions in future retiree health care liabilities from their books, while the UAW supported them as a way to protect retirees’ health care costs even if the automakers filed for bankruptcy or were bought by other companies.

As it turned out, GM and Chrysler did file for bankruptcy protection last year, and Chrysler is now run by Italian automaker Fiat Group SpA.

The trusts are now in jeopardy. Under a government-led emergence from bankruptcy protection, GM’s UAW trust fund received a 17.5 percent ownership stake in GM while Chrysler’s got a 55 percent stake in Chrysler. But those stakes have little value until the companies sell stock to the public again. GM hopes to have an initial public offering by the end of this year, while Chrysler hasn’t put a date on its sale. GM’s trust covers 700,000 retirees and spouses and Chrysler’s covers 120,000.

Ford’s trust is healthier. It already has $3.5 billion, mainly from previous trusts set up by the company.

Ford still owes the trust two notes that were worth a total of $7 billion as of Dec. 31, and the company can pay up to half of that obligation in stock. In exchange for all the payments, Ford unloaded a retiree health care liability valued at $13.6 billion.

Silvers said the UAW’s decision to form the trusts — or voluntary employee beneficiary associations — was essential for keeping Ford out of bankruptcy and helping GM and Chrysler exit quickly. But he said the trusts were underfunded from the beginning, because they relied on very low estimates for health care inflation, and he now believes the trusts will run out of money.

“It’s just not sound,” he said. “It’s the world’s largest underfunded health care company.”

Gary Chaison, professor of industrial relations at Clark University in Worcester, Mass., said this uncertainty is what the union feared when it reluctantly agreed to set up the trusts. While some health care trusts have performed well, others have failed, including a UAW-negotiated trust at Caterpillar Inc. that ran out of money in 2005.

“I think from day one the union was frightened of two things: The financial hazard involved and the possible conflicts of interest, that in order to keep it going it might have to force lower health care costs onto its retirees,” Chaison said. “These are risks they’re not used to.”

Still, Chaison said, the UAW’s decision to take over the trusts probably saved jobs, which was the union’s objective.

Ford and the union wouldn’t comment on the trusts or the warrant sale. An 11-member board of directors administers the UAW’s trusts. Eric Henry, the former chief investment officer of the $15.6 billion Texas Municipal Retirement System, is the chief investment officer.

Ford won’t get any proceeds from the sale. The trust set a minimum price for each warrant at $3.50. Each warrant gives the holder the right to buy a Ford share at $9.20. At the minimum price, the trust would get $1.3 billion.

To satisfy the warrants, Ford will issue stock to the buyers based on the difference between $9.20 per share and the share price at the time the warrants are exercised. If the stock price is $13.57, as it was Monday, buyers will get $4.07.

Ford also said Monday it will pay $3 billion to a revolving credit line that is due in 2013. The credit line will have a $3.7 billion balance after the payment, which will be made April 6.

Ford continues to be saddled with high debt. After the $3 billion payment, the company will still owe about $32 billion overall. Chief Financial Officer Lewis Booth said in January that the company has “an uncompetitive balance sheet” and will work on cutting debt this year, but he wouldn’t say what steps it will take.

The Dearborn, Mich., automaker mortgaged all its assets in 2006 and 2007 to secure a $23.4 billion credit line to cover its restructuring costs and losses. The money enabled Ford to avoid bankruptcy and government aid.

Ford posted a $2.7 billion annual profit for 2009 and said it expects to stay in the black in 2010. It was the automaker’s first annual profit in four years.