Thursday, May 21, 2009

Greenlight's Q1 2009 Letter

Greenlight's 2009 Q1 Letter detailed his holdings of Ford debt, as well as the common stock of Pfizer, Harman, and EMC. For example, Einhorn explains why Greenlight invested in Ford debt:

Ford is the third largest auto manufacturer in the world. We bought a large amount of secured bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average price of 37% of par, starting in the fourth quarter of 2008.

The bank debt is secured by almost all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5 billion valuation of the secured debt.

We observed that when the U.S. Government invested in General Motors, it put its money in junior to the secured bank debt. Even so, it does not appear that Ford will need a government loan any time soon, if ever.

Ford had the foresight to borrow money when the debt markets were accommodating. Ford reacted faster than its competitors to the slowdown by cutting production and other costs, improving manufacturing efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in the next mid-cycle of automobile sales.

We also bought a smaller amount of various bond issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The secured bank debt ended the quarter at 45% of par.
The letter, which ends with a quote by JFK--saying that "a nation that is afraid to let its people judge the truth or falsehood in an open market is a nation that is afraid of its people"--can be read in its entirety at Todd Sullivan's Value Plays.

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