WEEKLY UPDATE
On Oct. 28, Standard & Poor's held a conference call to address the cry that has echoed through the markets since it watchlisted Ford Motor Co. on Oct. 21. The call was much-anticipated by those looking to get a read on the likely ratings outlook. Unfortunately, it ended up as a mix of bile and confusion with little clarity being offered on what information is needed by the agency to make a decision. The set of prepared statements was largely off the script posted in the recent Ford frequently asked questions piece; there was little new. In the Q&A session, participants repeatedly expressed their desire for some hard data, real numbers, key metrics, observable milestones, distinct market parameters and some objective frame of reference. The level of frustration was understandably high since securities holders want to better follow where this exercise is going and appreciate what it is that drives the rating decision-making process. At the very least, auto investors need to undertake some fine-tuning of their expectations of rating agency behavior patterns to make sure that they do not get surprised again.
The call reflected a fairly measured attempt by investors to get their arms around the rating process for auto credits and Ford. Unfortunately, the presentation smacked of a "protect the franchise" attitude, rather than an attempt to deliver greater clarity. S&P gave few specifics on the subject of what it needs to know that it did not know before and what information could possibly be gathered that would allow for such a wide band of outcomes. Hard and fast numbers on topics such as pension-adjusted balance sheet measures, balance sheet liquidity and net debt targets did not play into the dialogue at all, despite requests.
The lack of such information means that the milestones are not clear and specific, leaving investors unable to monitor a company's progress against them. The auto breakeven metric has been one of the few specific numbers that was mentioned with some degree of regularity, to the degree of being seen as S&P's mantra. Yet on this call the agency downplayed that measure somewhat and indicated it felt "burned" by how that metric had been misinterpreted in the market. In our view, S&P should feel that more specific parameters need to be supplied rather than bemoaning the use of the one that was. The breakeven target had the merit of actually being specific, so if the market fixated on it, it is because it stood alone as a numerical parameter.
Bondholders are understandably railing against the lack of quantitative clarity and are wondering whether ratings standards should be taken seriously if they are different for different companies. This still gets back to the question of comparative financial and operating metrics and which objective indicators can be relied on to assess the risk of downgrades. It was suggested that S&P provide a "credit matrix," which would force it to clarify how it frames up balance sheet, profitability and liquidity measures across companies. We fully appreciate that agencies need to incorporate qualitative factors, structural risks (bank lines, maturity schedules, exposure to structural subordination) and numerous soft variables (economic outlook, quality of product pipeline, management execution) into the risk assessment, but investors are looking for more numbers and less qualitative chatter.
The takeaway points were limited for an hour-plus call, concentrating on the fact that a stable outlook could be delivered, which has helped Ford bonds trade better in the aftermath. That rally (and the enthusiastic reception to the subsequently announced DaimlerChrylser deal) is a sign of a market with a strong technical bid that is still hungry for yield, and the right news from S&P could get Ford back into a moderately tighter range than the levels we saw post the watchlisting blindside. However, it will not eliminate the seeds of doubt on the consistency of the agencies on auto paper and the fear of revisiting this again, which will ever hamper the upside trade in all the auto names.