Ford's $108 Billion of Bonds Skid to the Junkyard: Mark Gilbert Oct. 14 (Bloomberg) -- Ford Motor Co.'s one-year grip on the bottom rung of the investment-grade ladder is slipping. The company's $108 billion of bonds are on a journey to the junkyard.
Ford sales are shrinking even as the carmaker offers supersized rebates to shift inventory and make way for new designs. In the coming months, it will find suppliers playing hardball as surging steel prices work their way into the food chain.
It's time for Standard & Poor's analyst Scott Sprinzen to add a ``negative'' outlook to his BBB- assessment of the second- largest U.S. automaker, as a precursor to dropping Ford's credit rating to junk.
Sprinzen's Nov. 12 decision to knock Ford's credit rating down by one level, barely maintaining its investment-grade status, stoked a rally in corporate bonds around the world. Investors took comfort from the accompanying statement, which said ``the new ratings would not necessarily be jeopardized'' in the following two years by any failure to improve earnings.
Yet history shows that Sprinzen isn't afraid to break such pledges when appropriate. In October 2001, after cutting Ford's rating by two levels to BBB+ with a stable outlook, he wrote that ``further rating changes within the next few years are unlikely.''
Not Much Leeway
Just three months later, with the U.S. economy slowing, Sprinzen changed the outlook on Ford to ``negative,'' saying ``financial performance has deteriorated more than that of other industry players, and more than previously assumed by S&P.'' In October 2002 -- a year after saying the rating looked safe -- Sprinzen cut Ford's rating to BBB.
The New York-based analyst declined to comment for this column. Instead, he referred to his Sept. 17 ``Industry Report Card,'' in which he wrote that ``Ford's leeway at the current rating has diminished in the course of this year.''
Ford spokesman Glenn Ray said in an e-mailed response to a request for comment, ``We do not speculate on future actions of rating agencies.''
S&P wouldn't be the first to pin a non-investment grade rating on Ford. Egan-Jones Ratings Co., a private company run by Sean Egan in Pennsylvania, cut the automaker's grade in January 2002. Moody's Investors Service rates Ford two levels higher than S&P, at Baa1, though with a negative outlook.
Yield Readings
Ford's bonds seem to be anticipating the loss of their investment-grade classification. The company's $3 billion of 7 percent bonds repayable in 2013 yield about 217 basis points more than Treasuries. That's closer to the average spread of about 228 basis points on U.S. high-yield bonds than the 118 basis points on BBB-rated U.S. corporate debt, according to Merrill Lynch & Co. indexes. A basis point is 0.01 percentage point.
Second-quarter earnings for Dearborn, Michigan-based Ford almost tripled to $1.17 billion, or 57 cents a share, though that was driven by record profit at its Ford Credit financing unit. Those auto-loan profits will be harder to come by with the U.S. Federal Reserve raising interest rates. ``It is implausible to suppose that higher funding costs could be passed along to the consumer without significant consequences,'' S&P's Sprinzen said in last month's report.
The car-making business had a pretax loss in the quarter as its European luxury-brands unit, which includes the Jaguar and Aston Martin models, lost $362 million. For the third quarter, Ford expects to report earnings of 10 cents to 15 cents a share.
``Ford will lose its investment-grade rating unless it dramatically reverses Jaguar losses and improves its U.S. auto performance,'' said Matthew Winch, a London-based credit analyst at WestLB AG, in a note to investors. ``Risks of a cut to junk- bond status look higher than at any other point this year.''
Stuck in Reverse
Ford's U.S. sales declined 4.2 percent last month, even as the nation's total sales grew 10 percent. Ford truck sales rose 2 percent while passenger cars fell 19 percent, marking the 10th consecutive monthly drop in car sales. Ford offered incentives worth an average of $5,179 per vehicle last month, according to CNW Market Research. That's up 5.6 percent from August, higher than the $5,168 offered by General Motors Corp. and more than the average U.S. incentive of $4,523.
Rising steel prices pose an additional risk to Ford's revival efforts. U.S. import prices of hot-rolled steel used for frames and chassis have more than doubled in the past year, according to Metal Bulletin prices. The average price this year is $576 per ton, up from $288 last year.
Steel Deals
The various kinds of steel used contribute about $500 to $600 to the cost of building an average family car, said Chet Luy and Louis Intile, analysts at Barclays Capital Inc. in New York, in a research report last week.
Because automakers typically have two- to three-year supply deals, they ``likely had the pricing set in 2001 and 2002, when steel prices were even lower than 2003 levels,'' they said. Many of those contracts come up for renewal toward the end of the year. ``We forecast 20% to 25% increases in contract prices,'' the analysts said.
For at least the past decade, Ford has been the biggest debtor in Lehman Brothers Holdings Inc.'s investment-grade credit index -- by which many investors gauge their performance -- though it ceded the top slot to General Electric Co. in August. Ford bonds worth about $54 billion are included in calculating the index.
Many investors running corporate-bond funds wouldn't be allowed to own junk-rated Ford debt; a negative outlook on the current rating might be enough to start a stampede for the exit.
While the bond market endured the 2002 bankruptcy of phone company WorldCom Inc., which owed $41 billion to creditors, it has never seen a $100 billion-plus ``fallen angel,'' the term used for companies that lose investment-grade privileges. Ford's fall from grace, when it comes, will be quite spectacular.
