Ford Motor Credit Corp’s downgrade did not put the company on the sidelines. Just a few months later, it came back to market with two big deals. Edward Russell-Walling reports.
After one of the most seismic downgrades in recent bond market history, Ford Motor Credit Corp (FMCC) might have expected to keep a low profile, at least for a while. Not a bit of it.
The issuer has since stormed back into the market with not one, but two very successful unsecured deals.
Ford and General Motors, together with their finance arms, are the very bedrock of the corporate bond market. So when Standard & Poor’s downgraded their debt to speculative grade in May, the entire market had a serious fit of the vapours. The volatility that followed saw FMCC spreads oscillating by as much as 100 basis points (bp) in a single day.
Seized opportunity
By early June, investors had recovered some of their composure and, although few expected FMCC back in the market quite so soon, seizing opportunities is what the game is about. “We were keen to get out there,” says David Cosper, FMCC vice-chairman and chief financial officer. “The cost had gone up but, interestingly, the market had digested our rating. And, even though we are big in the market, we hadn’t been there for a while so there was an element of scarcity value.”
As the market calmed down, the issuer moved in smartly with a three-year $1bn deal. Joint bookrunners were Lehman Brothers and UBS, with price guidance at 337.5bp over Treasuries.
Interest, largely from the US, was “significant”, and the issue was boosted to $1.5bn with a launch spread of 330bp. This may have been overambitious and after-market spreads quickly widened by 20bp but, under the circumstances, few blamed FMCC for seizing what it could.
“The dollar deal was a real win but we felt it was important to get back into the European market, particularly in the FCE name,” Mr Cosper says. FCE Bank, a wholly owned subsidiary, had not issued in Europe for almost a year.
Working this time with bookrunners Dresdner Kleinwort Wasserstein, Lehman Brothers and WestLB, FMCC prepared a benchmark-sized (around €500m) two-year euro issue. It was in the market with the deal on July 7, the day that bombs exploded across London’s transport system.
“We pulled it, which was the right thing for everybody,” Mr Cosper says. “But then the market rebounded so quickly. London was very resilient and the markets were a reflection of that.”
So only days later, on the following Tuesday, they came back to market. Within three hours, the order book hit €2bn, with demand from across Europe and respectable interest from the US and Asia. The size was increased to €1bn, priced at the tight end of guidance, 280bp over mid-swaps.
“It was important to show we could issue globally,” says Mr Cosper. “This was a good deal, which sold out very quickly. We were pleased with it.”
In a perfect world, FMCC would like to be issuing slightly longer-dated unsecured paper. “Our maturities are typically in the five-year range,” Mr Cosper says. “The last couple of deals have been a little shorter – the risk appetite of investors is more comfortable with that. That’s not a bad maturity profile for us but we would like to get back into the five-year market.”
Change in ratio
FMCC’s funding has traditionally been weighted heavily towards unsecured debt but the ratio had been shifting even before the downgrade. At the end of 2003, securitised funding accounted for 25% of managed receivables. By June 30, 2005 that had risen to 36%.
“Clearly, we will be more in the asset-backed securities market because of cost,” Mr Cosper acknowledges. “We have ramped up our capabilities to do asset-backed issues around the world.” That includes Canada, Mexico, Australia, Japan and the larger European centres, while some smaller European countries are now being considered.
Securitisation evolution
Securitisation structures continue to evolve as well. FMCC recently began securitising operating leases. Another broadening of the securitisation focus involves loans with extended contracts – where the company has granted repayment extensions because of, say, a hurricane disaster in Florida.
“We like to securitise all our assets where we can – it’s such a large, liquid market,” Mr Cosper concludes. “But we still want the flexibility of being able to go into the unsecured market.”
To remind the world that there is life after downgrade, FMCC has now upped its forecast for 2005 debt issuance from $16bn-$22bn to $20bn-$25bn. About $19bn of that funding is already completed. And while a $18.5bn end-June cash pile gives some freedom of manoeuvre, the company can surely be expected back in the market before long.
