First quarter results have brought good news for General Motors and Ford but an interest rate rise in the US could put a different spin on these companies’ prospects.

General Motors and Ford, the world’s two largest auto-makers, both reported better-than-expected earnings last month. However, with US Federal Reserve Chairman Alan Greenspan hinting at an interest rate rise, credit analysts were mixed on the merits of these firms’ bonds.

Ford reported a more-than-double net earnings rise for the first quarter to $1.95bn, or 94 cents a share, from $896m, or 45 cents a share a year earlier. The company’s shares jumped 10% on the results while spreads on Ford Motor Credit Company’s 7% notes of 2013 narrowed by 7 basis points to 217 basis points, according to MarketAxess. This implies a modest improvement in investors’ risk perception.

The previous day, General Motors raised its full-year earnings forecast after reporting a market-beating first-quarter profit on stronger results from its finance arm and automotive operations in Asia.

But it was Ford that won the plaudits. “Unlike GM’s figures, Ford’s headline numbers did not promise more than the small print delivered,” said Georg Grodzki, global head of credit research at Royal Bank of Canada. “Although automotive cash generation declined moderately – much in contrast to its sharply increasing earnings contribution – it was significantly positive and compared well to the negative cash generation at GM’s automotive unit.”

Interest rate rise

However, Mr Greenspan’s testimony before the US congressional Joint Economic Committee, saying that the economy was expanding at a vigorous pace, hinted at a rise in interest rates.

Ford has said that a 100 basis point rise in rates would cut interest income on its financing activities by about $180m a year, small change considering Ford’s financing business generated close to $3bn last year. What’s far less predictable is the impact of a rate hike on consumer appetite.

Ford Motor Credit cut its estimated 2004 medium and long-term bond issuance by about $3bn to between $16bn and $22bn, a move designed to take advantage of stronger demand for short-term debt. Demand for commercial paper is increasing as investors look to park money ahead of anticipated rate hikes. Ford Credit had previously forecast plans to borrow medium and long-term debt of between $20bn and $25bn this year.

The financing arm will issue in both the secured and unsecured commercial paper markets, Malcolm Macdonald, Ford vice president and treasurer told Reuters. The $16bn-$22bn of longer dated bonds will be a mix of unsecured corporate bonds ($8bn-$10bn) and asset backed instruments ($8bn-$12bn).

Ford officials said it was inclined to sell more asset-backed securities for now because those markets seem to offer better funding costs, but that could change depending on market conditions. Ford also said it may sell more debt this year to finance some of its 2005 borrowing needs before an expected increase in interest rates. Last year the Ford Credit unit issued about $30bn of debt in 2003, including term asset-backed securities and unsecured corporate bonds.

Ford Motor has bought back more than $700m of high-cost debt this year and may buy back more, Mr Macdonald said.

After accounting for issuance and maturities, total long-term debt in the automotive division was listed on the balance sheet at about $18.5bn on March 31, down from $19bn at year-end 2003. Debt at Ford’s financial arm fell to $152bn from $159bn.

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