CreditSights: The Week In Credit
In the spirit of "anything you can do, I can do better" the Big Three auto companies have elevated upping the ante with each other into something of an art form. Initiatives rarely remain proprietary for long and any innovations that are deemed to be successful (a la zero percent financing) quickly become an industry standard. Hence it is not surprising that in the wake of the successful completion of GM's groundbreaking mega-deal the question seems to be when, not if, Ford will follow suit and tap the market in size. Investor sensitivity to the question is running at fever pitch and for good reason as they all own quite a bit more auto paper than they did just two weeks ago and no one is naïve enough to expect that another deluge of supply will only thump the spreads of the issuer behind the deal.
The market will likely trade as if it is a foregone conclusion that Ford will issue in size over the summer. However, we do not see Ford as doing a "pension deal" in the GM-mold per se, since they do not face that type of minimum funding requirement and have ample balance sheet liquidity to deal with the combination of minimum requirements on U.S. plans (GM is disproportionately larger in that area). So, from that perspective we feel the "GM look-alike" aspect on a Ford deal is being overstated. That being said, Ford is overdue to tap the market in size, at the very least at its credit unit. The company has been virtually shut out of the fixed-rate funding market since the summer of 2001 and they do have a relatively heavy upcoming maturity profile so a deal is likely, even if it is not a repeat of GM's pension funding exercise. The sector is still "hot" and as a deal is already heavily anticipated it would make sense for Ford to tap the term unsecured market. Watch for the possibility that they may also increase the conduit lines, just to be cautious. In our view, they will be looking to overfund down at the FMCC unit, not only with respect to their funding mix but also since they need to get defensive given the potential of getting bushwhacked by S&P on the short-term side if the UAW talks get ugly or the F-150 rollout does not go smoothly.
The bottom line for the short-term trade will be about technicals and not fundamentals and it makes sense to expect Ford to widen versus GM as they come to market sooner rather than later. If they do a deal, the street will likely take the lead on driving spreads wider and this time investors will be watching for the move. If Ford does issue and also looks to offer a round of convertibles in addition to a fixed rate offering (to build an incremental "war chest" for restructuring plants, employee buyouts, perhaps even some pension funding cushion), then the pre-issue spread widening trade would have even more momentum as the CDS market swoops in. Needless to say, auto spreads generally would be weakening in sympathy but Ford would be the underperformer. Such an outlook warrants much caution on the auto sector even amidst its current strong performance but as the crow flies over the next several quarters, we recommend index managers overweight the autos against the peer group on medium grade corporates given the total return framework. And, strap in it's going to be a bumpy ride!
