Ford to Ascend to Investment-Grade Bond Indexes at Month End

Ford Motor Co. (F), the largest corporate borrower in U.S. high-yield indexes, will ascend to investment- grade benchmarks at the end of the month following its upgrade by Moody’s Investors Service.

Bonds of the second-biggest U.S. automaker will shift to Barclays Plc’s U.S. Corporate Investment-Grade index at the close of business on May 31 and will be reflected in June returns, Brandon Ashcraft, a New York-based spokesman for the bank, said today in an e-mail. Bank of America Merrill Lynch also resets its indexes monthly based on bonds’ average ratings, according to a Jan. 20 report.

Ford’s rating was lifted two levels to Baa3, the lowest level of investment grade, from Ba2, Moody’s said yesterday in a statement. The move followed Fitch Ratings’s upgrade of the Dearborn, Michigan-based company from junk status on April 24. Bond-fund managers are adjusting their holdings to match changes in the indexes, said James Lee of Calvert Investments, which manages about $12.5 billion.

“Most fixed-income guys are mindful of what index they’re being measured against,” Lee, a senior high-yield analyst in Bethesda, Maryland, said in a telephone interview. “By not buying Ford, you’re making a pretty bold call.”

Ford’s $25 billion of index-eligible junk bonds would make it the biggest issuer to ever move between the two categories, Barclays analysts led by Bradley Rogoff wrote in a February report.

Ford Bonds Rise

High-yield, high-risk, or junk bonds are graded below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s and Fitch.

Ford’s $1.25 billion of 8.125 percent notes due January 2020 rose 4.5 cents since the upgrade to 127.5 cents on the dollar as of 3:10 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has climbed from 123 cents on May 21 and traded below par as recently as two years ago.

Ford bonds account for 2.94 percent of the market value of the Barclays U.S. Corporate High Yield index and 2.82 percent of the Bank of America Merrill Lynch U.S. High Yield Master II Index.

Some high-yield funds are likely selling Ford’s bonds now, leaving them with cash they’ll have to invest in other debt, said Martin Fridson, global credit strategist at BNP Paribas Investment Partners.

‘Cash Inflow’

“It’s the equivalent of a big cash inflow into the market,” Fridson said in a telephone interview.

About half of Ford’s debt is held in funds that won’t need to sell it, the Barclays analysts estimated in the February report.

Sprint Nextel Corp. (S), the third-biggest U.S. wireless carrier, is the next-largest high-yield issuer, with $20 billion of index-eligible debt, according to a May 1 report by the Barclays analysts. Its $2 billion of 6 percent notes due in December 2016 fell by 0.5 cent to 90.3 cents on the dollar at 11:48 a.m. in New York, Trace data show. The debt has climbed from 85 cents at the beginning of the year.

Fitch raised the automaker’s rating to BBB- last month, leaving S&P alone among the three biggest ratings company with Ford at speculative grade. Barclays requires that a borrower be ranked investment grade by two of the three to be included in the high-grade index.

To contact the reporter on this story: Zeke Faux at zfaux@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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