Ford bonds see volatile week after Moody's downgrade to junk
NEW YORK, Sept 13 (IFR) - Ford Motor bonds suffered a volatile session last week after Moody's downgraded the storied automaker to Ba1 from Baa3, consigning it into junk territory and raises concerns about its investment-grade status.
The company's bond spreads widened on the news, as secondary prices fell a good two points, only to tighten by the week's end as Treasury yields jumped.
Ford's US$1.25bn 5.113% 10-year traded as high as Treasuries plus 348bp last week, about 88bp wide to where the bonds priced in May and about 124bp over average Double B spreads as calculated by ICE BAML.
S&P and Fitch are maintaining their BBB/BBB ratings for now, but it is widely expected that one or both will cut the company one notch to the lowest rung of investment-grade by year-end.
While that would keep Ford in investment-grade territory, there is still the question of whether S&P or Fitch would place the company on negative outlook.
"It is our read that S&P is giving Ford some room to execute on its turnaround plan and has signalled that its full downgrade to high-yield would need to be partly driven by a broader global recessionary backdrop," CreditSights noted in a report.
"As such, we see Ford as being part of the IG index for the next six months."
Against that backdrop, investors remain in two minds about increasing exposure to the credit after some cheapening last week.
"It gets very hard with fallen angels and rising stars, because when the story feels the worst it can often be the best time to buy and the opposite can be true on the way up," said Kurt Halvorson, portfolio manager at Western Asset Management.
"But for us to feel comfortable with the pricing we need to see some better fundamental positives in this story."
Ford is in the midst of a long business restructuring plan to help it better adapt to consumer demand for larger vehicles, electric cars, autonomous driving and expand the carmaker's footprint overseas.
The restructuring is expected to be costly and extend through the 2020/2021 period and include a lengthy period of negative cashflow, Moody's noted in its report.
"The restructuring is expected to extend for several years with US$11bn in charges, and a cash cost of approximately US$7bn," the Moody's report notes.
"Ford is undertaking this restructuring from a weak position as measures of cashflow and profit margins are below our expectations, and below the performance of investment-grade-rated auto peers."
(This story will appear in the September 14 issue of IFR Magazine.)
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