When Ford Motor Company faced the possibility of a serious downgrade by
S&P’s, both the auto sector and the bond market held their breath. Geraldine Lambe reports on how Ford kept in the game.
Last month, Ford Motor Company narrowly avoided the ignominy of being
downgraded to junk status by Standard & Poor’s (S&P’s). It
followed several weeks of speculation after the rating agency’s
announcement at the end of October of a downward review of Ford and
Ford Motor Credit’s rating. While the company was downgraded by a notch
to BBB-, it was assigned a stable outlook.
The bond market heaved a collective sigh of relief at the news of the
reprieve. When S&P’s first announced its downward review in October
(after DaimlerChrysler’s rating was shunted from BBB+ to BBB-), it
brought the auto debt rally to a screeching halt and even raised fears
that Ford’s fall from grace, with Ł120bn of debt, could unbalance the
entire bond market; a downgrade combined with a negative outlook could
have triggered the wholesale dumping of Ford bonds by high-grade
investors.
But, following the good news and after many weeks labouring at about
310-315 basis points over Treasuries, Ford Motor Credit’s 2013 bond
spreads narrowed by about 60bp, trading at 247bp at their tightest so
far. Relief was so pronounced that Ford’s spreads are tighter now than
before the October announcement. And S&P’s made it clear that there
was no chance of further downgrade any time soon, as long as Ford
maintains a large liquidity position and Ford Credit retains funding
flexibility.
Others in the auto sector benefited from the market’s response –
General Motors and DaimlerChrysler bond spreads narrowed to about 30bp
and 20bp – and it fanned hopes that the auto market as a whole may see
further spread tightening before the year end.
Smart business
According to research agency CreditSights, the effect of Ford’s
downgrade on its ability to maintain its current level of commercial
paper outstanding is uncertain – its short-term debt was downgraded to
A-3. But the company’s analysts believe it has already gone some way
towards shoring up its position. “In our view, the company pulled off a
master PR coup with its offer to buy back paper on news of the
downgrade,” says CreditSights. “It is smart business to stay endeared
to mutual fund families that will be buying Ford paper in their more
flexible bond funds – as opposed to money market funds – and the move
also underscored that the company has the flexibility to execute on
such a buyback.”
Other analysts believe that Ford is entering into unchartered waters,
as no issuer has remained a presence in the euroCP market following a
downgrade into A3 territory.
“Some investors are increasing their A3 allocation to enable them to
buy more Ford because they are so comfortable with the credit or are
looking for yield pick-up,” says a London-based analyst. “But others
will be forced to leave the credit alone. The A3 CP market is not huge.”
