Credit market players last week were digesting Ford Motor Co.'s proposed $15 billion secured financing deal, noting long-term concerns for bondholders and a shift in the borrowing habits of companies. The deal gives Ford badly needed liquidity, but it drops a bundle of secured debt on top of the company's bonds. "Long term it is negative for the bondholders, but short term it gives them liquidity for the difficult year ahead of them," a bond trader said.
The deal is Ford's first syndicated bank credit and it is indicative of a trend in the capital markets, bankers and traders said. "More companies are choosing the loan market for ease of execution," one trader said. "Secured financing is much cheaper than issuing unsecured debt. For their ratings profile, it is more conducive for them to issue loans. Until you have defaults, issuing unsecured debt is not as attractive." Other companies that traditionally have issued unsecured debt but recently turned to the secured bank loan market include Visteon Corp., Oshkosh Truck and Penn National Gaming.
Bank loan investors have been welcoming the newcomers to the party. Ford certainly has their attention. "It's a BFD," one portfolio manager. "It's a big freaking deal; it's the big thing this week." The credit consists of a five-year, $8 billion senior secured revolving credit facility, which replaces a $6.3 billion revolver; a $7 billion term loan and $3 billion of unsecured capital market transactions, which may include unsecured notes convertible into Ford common stock. Price talk is LIBOR plus 3% on the term loan, according to a buysider. Lead arrangers Citigroup, Goldman Sachs and JPMorgan launched syndication of the new credit last Wednesday at a bank meting at the Marriot Marquis in New York.
While investors like the credit's security "It has incredible collateral coverage," a buyside trader said there was some grumbling about the pricing. "Do you want to be involved in that?" asked one portfolio manager. "Will they go bankrupt in two years? You should be comfortable with the credit in the senior secured perspective, but is LIBOR plus 3% enough payment?"
Meanwhile, back in bondland, Standard & Poor's lowered its senior unsecured debt issue ratings on Ford Motor Co. to CCC from B, reflecting the large disadvantage to Ford's unsecured creditors. Moody's lowered the company's senior unsecured rating to Caa1 from B3. A dealer said the downgrades were anticipated by the market. Ford's bonds were active, but did not drop after the announcement of the financing package and subsequent downgrade by the ratings agencies. Its '31 bonds remained unchanged at 78 1/2, while its five-year credit default swaps widened slightly to 565-575 basis points from 562-575 basis points, according to GFI Group. Ford Motor Credit's CDS tightened to 340-345 from 352. The bond trader added that some accounts that invest in both loans and bonds may start to sell the bonds to invest in the company's loans, but that there is still a big demand for Ford's bonds in the high-yield market.
A Ford spokeswoman would not comment on why the company chose to do mostly secured financing over unsecured financing. "We have short and near-term negative cash flows. We need liquidity to fund restructuring," she said. She declined to comment on the potential negative effect the secured financing could have for Ford's bondholders. One investor said he doubted Ford would be able to do unsecured financing even if it wanted to. "I don't think Ford would survive without this transaction," he said. --Kim Moore
