Investors in Ford Motor Co. paper say they remain skeptical on the credit and the auto sector in general despite the 35 basis point rally in the issuer's benchmark notes last Wednesday. The spread tightening came after Standard & Poor's downgraded Ford but placed its ratings on a stable outlook. The S&P downgrade to triple-B minus was expected, but some market observers had feared the rating would also be placed on a negative watch, leaving the benchmark 7% notes of '13 destined for junk-bond status.
The decision to assign Ford a stable outlook is positive because it gives investors three months or so to decide what their exposure will be to Ford and, by extension, autos in general, says Peter Loftus, portfolio manager at HSBC Bank. "If it was negative, you'd have to make a decision very quickly. [S&P] could come back in a month and say, 'Okay we're going to double-B.' At this point it would be very difficult [for S&P] to do another downgrade after going from negative to stable," Loftus says. Still, he plans to reduce HSBC's underweight exposure to the name, particularly in total return portfolios, where he believes it could be a drag on performance.
Sai Choy, portfolio manager at Fischer Francis Trees & Watts, says he will maintain a slight underweight on the auto sector, largely because carmakers are losing market share to foreign competitors. "We respect that it's a large sector with a lot of spread on it, but it has negative credit trends," he says.