UPDATE:Ford CEO: Restructuring Participation Up To Bondholders

Ford Motor Co. (F) Chief Executive Alan Mulally said he expects bondholders to participate in a plan to help the company retire as much as $10.4 billion in debt.

"I think that's a decision they're going to make but we're offering them a premium and also we're doing it in cash so this is a real value to them," Mulally said during an interview with Fox Business Network Thursday. "This is a restructuring of the industry and all of the shareholders, all stake holders are participating."

Mulally's comments come one day after Ford announced it will seek to retire up to $10.4 billion in debt, or 40% of the car maker's total, as it moves to further cut costs. The auto maker plans to use a combination of stock and cash largely from its financing arm to pay investors who turn in their debt. Total Ford debt stood at $25.8 billion at the end of 2008.

"We are advising bondholders to hold out," said KDP Investments Advisors Inc.'s Kip Penniman. "Ford is shrewd to make this announcement before General Motors Corp. (GM) bondholders are offered a deal that may prove considerably more attractive than Ford's present offer."

GM bondholders are meeting with the U.S. Department of Treasury Thursday. GM is looking for more federal aid to keep its operations running while Ford has sidestepped the need for aid.

"While the automaker's offer represents a premium to where the bonds had been trading, we believe Ford's offer is weak given its relative strength compared to GM," Penniman said. "We continue to believe that Ford is the least likely of the Detroit Three auto makers to face a bankruptcy filing given the company's liquidity profile."

Ford is making three different offers to retire debt.

Under the auto maker's conversion offer, debt holders would receive 108 shares of Ford stock and $80 in cash for each $1,000 they have in bonds. The value of the offer would be about 28 cents on the dollar based on Thursday's share price.

Those participating in Ford Motor Credit's term-loan offer would receive up to 47 cents on the dollar while the majority of unsecured note holders would get 30 cents. All the figures could change depending on the movement of the company's stock price.

"I don't see why one would want Ford stock unless you believe they will avoid bankruptcy," Morningstar Inc. auto analyst David Whiston said. "In bankruptcy you're better off being a bondholder. To take this deal, the bondholder has to believe that they will never get better than 28 cents on the dollar for Ford debt."

Ford shares fell 6 cents or 3.2% to $180 in earlier trading Thursday.

Moody's Investors Service Wednesday cut Ford's probability of default rating one notch to Ca, or highly speculative, but left the company's corporate family rating at Caa3. The rating outlook is negative.

Standard & Poor's Ratings Services downgraded its corporate credit rating four notches to CC, or highly speculative, with a negative outlook. Fitch Ratings left its issuer default rating at CCC, or highly speculative, saying it would view the exchange of cash and equity for debt as a mild positive.

Separately, Mulally said Thursday he expects the company's cash burn to be lower this year than in 2008 when the company spent more than $20 billion and finished the year at $13.4 billion.

Mulally said most of that spend was attributed to reducing its output and work force as auto sales continued to slow amid the slumping U.S. economy.

"We have the production down to where we need to for demand," Mulally said.

-By Jeff Bennett and Paul Hotz, Dow Jones Newswires; [phone]; [e-mail]