Ford Upgrades Opens Door to Unsecured Finance
Ford Motor Co. (F)’s return to investment-grade is freeing the second-largest U.S. automaker to borrow in the unsecured debt market, reducing its reliance on asset-backed bonds to lower borrowing costs.
Ford’s finance unit was able to sell $1.5 billion of unsecured five-year notes yesterday with a coupon of 3 percent, about 2 percentage points more than the cost of the similar- maturity portion of its most recent asset-backed issuance, according to data compiled by Bloomberg. In 2006, after Dearborn, Michigan-based Ford’s ratings were cut to junk, the gap was more than 4.5 percentage points, the data show.
The automaker, which was upgraded by Moody’s Investors Service and Fitch Ratings in the last two months, has set a goal of cutting the percentage of receivables that it pledges to back debt to 35 percent in the next few years from 54 percent as of March 31. That would give bondholders more assets to draw on in a cash squeeze, said Mirko Mikelic, a money manager at Fifth Third Asset Management.
“This is a good move for unsecured bondholders,” Mikelic, who oversees $13 billion in fixed-income assets including Ford bonds from Grand Rapids, Michigan, said in a telephone interview. “If they are stressed or have to file for bankruptcy, you have something supporting those assets.”
While interest rates on unsecured debt typically are higher than those on asset-backed bonds, the rising proportion of unencumbered assets provides Ford with a cushion to support borrowing during future recessions, according to Bob Shanks, Ford’s chief financial officer.
“You want to be in a position going into a downturn or into a weak economic environment, where if you need to increase the amount of asset-backed as a percent of your total funding that you’ve got the room to do that,” Shanks said in a June 4 interview. “It gives you flexibility in funding in bad times.”
Standard & Poor’s downgraded Ford Motor Credit to junk in May 2005. Fitch followed that December and Moody’s did so the following month, Bloomberg data show. The finance arm increased issuance of securities backed by loans to $12.6 billion in 2005 from $1.9 billion the prior year, Bloomberg data show.
In August 2006, the unit issued $1.5 billion of 9.875 percent, five-year notes, the data show. A similar-maturity portion of auto-loan-backed debt sold that month had a coupon of 5.25 percent, a gap of 4.63 percentage points.
The 3 percent coupon on the Ford Motor Credit notes sold yesterday compares with the 1 percent interest rate on five-year securities backed by auto loans that it issued in April, Bloomberg data show.
“If you have the more flexible option, why not do that?” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia said in a telephone interview yesterday. “The spread difference between the two securities is so minimal at this point.”
Moody’s triggered the exchange of $2.5 billion in asset- backed debt for unsecured obligations this week when it followed Fitch in lifting Ford’s credit ranking from junk. The debt was sold last year with a provision that it would automatically convert to regular corporate bonds in the event that two of the three major rating companies raised the automaker to investment grade.
Ford currently is rated Baa3 by Moody’s and an equivalent BBB- at Fitch, the lowest investment grades, while S&P has it at BB+, the highest junk level.
“It’s a lot stronger than it was a couple years ago,” Lurie said. “Many didn’t expect the company to get into the investment-grade range so quickly.”
Fitch, in an April statement, said its upgrade reflected “improved financial performance, balance sheet repair, and product portfolio improvement that have taken place over the past several years.”
The automaker has had 12 consecutive profitable quarters through 2012’s first three months. Ford earned $29.5 billion in the last three years after $30.1 billion in losses from 2006 through 2008.
“It was easy to see coming,” said Marc Gross, a money manager at RS Investments in New York who oversees $3 billion in fixed-income funds. “They’ve had a strong focus more than I’ve ever seen to get to investment grade”
“Getting to the lowest rung of investment grade was fantastic, but it’s just a step on a much longer journey,” Shanks said. “We do need to get the company well into investment grade because we intend to stay there even in future downturns, even should they be severe.”
Maintaining access to both secured and unsecured funding is crucial, according to Mack Caldwell, an asset-backed debt analyst at Moody’s.
The extra yield investors demanded to own top-ranked bonds linked to auto loans rather than Treasuries soared to a record 825 basis points, or 8.25 percentage points, in November 2008 after Lehman Brothers Holdings Inc. collapsed. The debt currently pays a spread of 57 basis points, according to a Bank of America Merrill Lynch index. A basis point is 0.01 percentage point.
Issuance froze in January 2009 amid the seizure in credit markets, Bloomberg data show. The Federal Reserve started its Term Asset-Backed Securities Loan Facility two months later to revive the market for bonds tied to consumer and small business loans as the financial crisis sapped demand.
“When one market is unavailable you want to be able to continue funding your business in other sources,” said Caldwell of Moody’s. “In the credit crisis, the ABS markets were challenged to do deals. One of the great lessons learned was that diversification of funding is important.”