NEW YORK, 11 September 2006 — Optimism about turnaround efforts at General Motors Corp. and Ford Motor Co. are luring investors back into their bonds in a big way, even as their debt ratings are poised to slide deeper into the junk ranks.
Concerned that more drastic downsizing is needed to fix the automakers, leading rating agencies have both GM and Ford on review for more debt downgrades, threatening to push the companies closer to the tier of the highest-risk borrowers.
Yet hopes that GM and Ford are planting the seeds of a recovery have pushed their bond prices to the highest levels in a year, sending borrowing costs tumbling even as ratings decline. “The market has discounted the rating agencies, and really ratings don’t matter any more — not for all credits — but for Ford and GM,” said Brad Rubin, senior credit analyst at BNP Paribas in New York.
With automakers’ bonds now mostly in the hands of hedge funds and high-yield bond managers, those investors’ major concern is whether the companies go into bankruptcy or not, he said, and that risk does not look as threatening as it once did.
Ford’s benchmark long bonds with a 7.45 percent coupon due in 2031 have jumped by 10 cents since late June to about 80.25 cents on the dollar. That is higher than any closing price since September 2005, according to MarketAxess.
GM’s benchmark 8.375 percent bonds maturing in 2033 traded this week at 87.25 cents on the dollar, higher than any closing price since August last year.
The rally has come after the worst period of ratings erosion for either automaker since they lost top triple-A ratings a quarter of a century ago. “I think they’re close to stopping the decline in ratings; nevertheless, they’re still at a pretty low point,” said Mirko Mikelic, portfolio manager and senior credit analyst at Fifth Third Asset Management in Grand Rapids, Michigan.
Moody’s Investors Service ranks Ford five steps below investment grade at “B2” and GM one notch below that at “B3.” Standard & Poor’s ranks Ford four steps below investment at “B-plus” and GM one notch lower at “B.”
Ford has said that later this month it will announce an accelerated restructuring plan that already includes slashing 30,000 jobs. Ford also named former Boeing Co. executive Alan Mulally its new chief executive this week, raising hopes he would repeat at Ford his success with Boeing’s comeback. GM this week reported progress in labor talks at its bankrupt supplier Delphi Corp. The automaker is also mulling a possible alliance with Renault and Nissan and in July posted its first operating profit in global auto operations since 2004.
“It looks like they’re making all the right moves in terms of reducing capacity and cutting costs, and now it’s a matter of what they are doing to defend their market share,” Fifth Third’s Mikelic said of the automakers. A main concern with Ford is that its money-making F-150 pickup truck will face more competition from new GM models and Asian rivals, said Mikelic. Ford is thus likely to experience more losses in the near term until new models come out later in the year.
Craig Hutson, senior bond analyst for independent research service Gimme Credit, said he expects more pressure on ratings. Ford could have a “pretty ugly” second half as scheduled production cuts take a toll on its cash flow and income statements, he said.
