Investors say it is still too early to take advantage of weakness in the auto sector, as they see the potential for further spread widening. Rating downgrades last Tuesday caused 10-year spreads to back up some 80 basis points onFord Motor Co.--the corporate bond market's largest issuer. Ford's benchmark 7% notes of '13 had recouped 15 basis points by last Friday morning, but Jeff Ebert, portfolio manager at U.S. Bancorp Asset Management, is not convinced the pain is over. He sees Standard & Poor's dropping Ford one notch to BBB-, just one level from junk. "That's what's reflected in the spreads right now. If they leave the negative outlook on then there's more downside from here," he says. S&P downgraded DaimlerChrysler and put Ford on review for downgrade last Tuesday. Scott Sprinzen, analyst at S&P, says the agency does not have sufficient concern at present that would merit a downgrade of more than one notch. He would not, however, rule out the possibility of Ford eventually going to junk.
Because autos are the largest sector in the corporate market, having an underweight carries risks of underperforming other portfolio managers. But Dan Vrabek, head of fixed-income at Waddell & Reed, which has $3.5 billion in bonds under management, will stay "light and short until we see fundamental improvement--if [auto] spreads get real wide again and we think they can survive a couple of years [without defaulting] we might add exposure in the shorter maturities," he says.
U.S. Bancorp had lightened up on Ford in favor of General Motors before last Tuesday. Ebert says the Minneapolis firm, which has $17 billion in taxable bonds under management, will likely remain underweight to neutral on Ford until S&P reaches a decision on the company's rating. Moreover, U.S. Bancorp will remain neutral on autos through year-end. "There are corporate sectors where maybe it makes to take some additional credit risk, but this late in the year, autos isn't one of them," Ebert says.
Investors who see the recent spread widening as a chance to add some risk are not exactly diving in. Greg Habeeb, portfolio manager of $3.5 billion at Calvert Asset Management, has been buying $5-8 million in auto paper with every 20 basis points or so of widening, but remains underweight. He says that while there are risks, he believes the industry is a survivor, and Ford in particular offers considerable spread compared to the rest of the corporate market.
Also underweight is Federated Investors, which may add just $20 million in auto paper to its $4 billion corporate portfolio in a week or so, says Joe Balestrino, portfolio manager. "Permanently is a strong word, but for a long time to come I think autos will trade wide of their historical ranges and wide of the market at large." Balestrino argues that, due to overcapacity and the industry's capital intensive nature, it may remain stalled even as the economy improves. "You can't exactly say it's the airline industry, which is in much worse shape, but they have some problems in common: it's worth having the conversation."