Analysis: Ford could close U.S. pension funding gap by end of 2014

Wed Jul 31, 2013 1:03am EDT
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By Deepa Seetharaman

DETROIT (Reuters) - Thanks to rising interest rates and an injection of cash, Ford Motor Co (F.N: Quote) could be in a position that would have been unthinkable only a few years ago - with a fully funded U.S. pension fund.

Ford, which went through a searing restructuring in 2006, but avoided the bankruptcy route of its rivals General Motors (GM.N: Quote) and Chrysler FIA.MI, could cut its U.S. pension shortfall by half or even more by the end of this year from $9.7 billion at the end of 2012, according to securities analysts and Reuters calculations.

And the gap could be eliminated by the end of 2014 provided interest rates rise as economists expect and the stock market remains robust. That may give Ford added resources to pay down debt, invest in its businesses, or boost dividend payments, analysts said.

"It is a true obligation of the company right now and it's taking quite a bit of capital," Ford Chief Financial Officer Bob Shanks said of the automaker's pension gap in an interview.

"Once we get it fully funded, de-risked and sort of put it in a box, it gives us the ability not to worry about it so much and take future cash flow and put it wherever we want," he said.

If Ford fully funds its U.S. pension plan by the end of next year that would be quicker than many analysts had expected. GM could be about one to two years behind Ford in closing its U.S. pension gap, said Guggenheim Securities LLC analyst Matt Stover.

But critical to this scenario is that interest rates used to calculate retiree pension obligations continue to rise. Ford would also have to be willing to contribute at least $1 billion in 2014 to close its U.S. pension gap, analysts said.

Eliminating the shortfall is "possible by the end of 2014 and it's going to be because interest rates climb," said Stover, who predicts Ford's U.S. pension plans will be underfunded by about $4 billion by the end of 2013.   Continued...

A Ford logo is seen on a car during a press preview at the 2013 New York International Auto Show in New York, March 28, 2013. REUTERS/Mike Segar