Usually a downgrade to junk means a company will not be back in the global bond markets any time soon. Ford Motor Credit, on the other hand, came out swinging. Danielle Robinson reports.
In June, just four weeks after Standard & Poor's delivered its downgrade of both Ford and GM, Ford Motor Credit Co was pricing a $1.5bn three year global bond.
The deal, led by UBS and Lehman Brothers, was revelatory in that it proved there was still a sizeable bid for the car company's bonds. It also marked FMCC's new, more aggressive approach to the unsecured debt markets to match tougher times.
Rather than the usual rant against hedge funds using its bonds for a quick play on volatility, FMCC is embracing them.
The $1.5bn three year trade in June was driven by several hundred million dollars of reverse inquiry from accounts wanting to jump on to the auto volatility bandwagon. But the leads faced 20bp-30bp swings in auto bid/offer spreads in the secondary market.
"What was attractive about this deal was that accounts who were getting on board the auto momentum trade were able to get a block of bonds without the market moving against them," said a banker at one of the leads.
FMCC has also moved away from its favoured, more prudent strategy of assuring global bond investors its deals will not grow beyond a certain size, an approach it used in January to great effect to price $1bn of three year globals at 163bp over Treasuries.
Six months later, FMCC was offering investors 337.5bp over Treasuries for a new three year, a spread which unsurprisingly attracted more than 120 accounts and $2.5bn of orders.
FMCC quickly bumped up the size by $500m to $1.5bn and tightened talk to price at 330bp over Treasuries, at a time when its CDS spreads were in the 260ish area.
A day later it had gapped out 20bp, but no one seemed to care.
"I personally think the deal was too big," said one manager of a high grade corporate bond syndicate in New York. "But then again, if I worked in their treasury department, I would be grabbing all that I could get."
Ford Motor Co is now in the junk bond market for the foreseeable future, after Moody's downgraded it in August. FMCC, on the other hand, is still clinging on to the high grade corporate bond indices, but essentially trades as a junk bond credit.
In mid-July FMCC's European financing arm FCE Bank was inspired by the success of its competitor GMAC in issuing a Eu500m two year bond, which lead managers Citigroup and Lehman had priced the Wednesday before at 337.5bp over mid-swaps.
The GMAC deal had impressed European investors, who had seen it not only withstand the previous week's terrorist attacks in London but also tighten about 10bp against Bunds by early the next week.
On July 12, and still rated junk at the time, FCE Bank reintroduced a two year euro deal that it had been forced to pull the week before because of the bombings. The deal was led by Dresdner Kleinwort Wasserstein, Lehman Brothers and WestLB.
Back in time for lunch
In a whirlwind three hours over 100 accounts poured in of more than Eu2bn orders for the benchmark-size two year transaction, marketed at 280bp-300bp over mid-swaps.
FCE Bank snatched up Eu1bn, priced at the tight end of talk, at 280bp over mid-swaps and went home for lunch.
The deal's aftermarket performance was choppy, but again no one seemed overly concerned. "You have to expect that these sorts of names will attract hedge funds and other investors that aren't in it for the long term," said one market source in London.
FMCC has continued to shrink its balance sheet and therefore its need for unsecured funding. Its asset base in July stood at $155bn, from around $170bn in 2004.
The finance arm is also reducing the amount of bonds it has outstanding in the unsecured debt markets. It has $27bn maturing in the retail and institutional unsecured markets this year, and so far it has only issued $8bn of unsecured debt ($7bn in the institutional market and $1bn in retail by July).
FMCC has for the past two years done most of its capital raisings in the secured debt markets, where, like GMAC, it has excellent access and achieves very tight spreads. By July 15, year-to-date securitisation issuance was at $10bn, and it is forecast to be $12bn to $15bn for the full year.
FMCC's access to the international unsecured debt markets has been markedly better than GMAC's, which by mid-August had only done its two euro offerings to raise about $800m.
Although $8bn is about half of what Ford issued in unsecured retail and institutional debt markets in 2003, it is better than the $4bn-$6bn it had previously forecast for 2005. FMCC is now planning $8bn-$10bn in the unsecured debt markets this year.
FMCC has also been successful at cultivating other markets. Despite the global markets' fixation with the decline of the automakers in February, FMCC spent a week in Tokyo doing one-on-one meetings and group presentations.
FMCC also followed the advice of its lead managers, Daiwa SMBC, Mitsubishi, and Mizuho, and obtained A ratings from two Japanese rating agencies, R&I and JCR, to bring in more accounts.
It ended up issuing a spectacular ¥160bn three year Samurai bond, increased from ¥30bn and the largest single tranche Samurai ever launched.