With its unsecured debt trading at levels more in line with a double-B credit rating, Ford Motor Credit has greatly reduced its borrowing this year, while stepping up its ABS issuance. But the relatively modest amount of liquidity Ford requires in the coming 15 months, combined with a diverse base of securitization vehicles, the company should be in good position to navigate rough waters ahead, noted Alex Roever, group head of ABS research at Banc One Capital Markets.
Also last week, Merrill Lynch & Co. released a report concurring with Banc One, noting a still fairly large investor base for Ford paper. The recent spread widening is more a function of increased scrutiny in both the unsecured market and widening in the broader ABS market in general, researchers at Merrill noted.
Despite the steep discount the corporate debt market is currently placing on Ford triple-B rated debt, which was placed on watch for a downgrade by Standard & Poor's Corp. last Wednesday, the asset-backed market provides the benchmark issuer with ample opportunity to fund its operations in the near term. "We know there is more headline risk coming but a negative outlook, or even a downgrade of its corporate debt, does not change our view," added BOCM researcher Alessandro Pagani.
Banc One estimates that Ford will need a total of $25 billion to $37 billion of term funding (ABS and debt) through year-end 2003. Though Ford has already issued roughly $16 billion globally ($12.6 billion off its Ford Auto Owner Trust vehicle), Roever argues that, if needed, Ford could sell an additional $8 billion of ABS before year-end, albeit at wider spreads than previous offerings. Ford also has roughly $9 billion available in various conduit facilities.
Merrill fully expects Fords auto loan ABS spreads to come under pressure in the future, but widening in triple-A classes should pan out at "no more than a few basis points," according to Merrill's Theresa O'Neil. An expected spike in auto ABS supply and the overall dreary economic outlook are seen pressuring Ford's spreads going forward, adds O'Neil.
Ford's flexibility in the ABS arena is the result of the various issuance programs allowing it to issue ABS backed by an array of assets. In addition to the prime retail auto loan, Ford can also securitize U.S. dealer floorplan loans, U.S. auto leases, Euro auto loans, Japanese auto loans, as well as non-prime loans from its Triad subsidiary, which tapped the market in mid-August. While Ford has yet to issue floorplan ABS this year, it sold $5 billion in two concurrent offerings last year.
If, as Banc One believes, Ford can issue up to $10 billion of floorplan ABS through the end of next year, combined with its standard auto loan supply of almost $20 billion and the $9 billion of conduit funding availability, the ABS market alone could satisfy the automaker's funding needs, without having to sell unsecured debt.
But, as investors have asked: "How much more capacity (for ABS) can there be?" Banc One believes there is "plenty" of room for Ford to issue its various asset types. Noting the relatively short life of auto paper (around 18 months) Ford accounts for just 4% of total ABS supply outstanding, which "is less than several other large ABS issuers, including Citibank and MBNA." By contrast, Merrill estimates Ford to account for 16% of the auto sector of the ABS market.
Given the senior/sub, sequential structure of Ford Credit's auto ABS, with either fixed- or floating-rate classes that can be issued with a bullet maturity, Merrill believes the investor base for Ford's deals to be quite wide, Merrill states in its research. Banc One agrees, adding that while "a few investors have started avoiding Ford (ABS) due to its unsecured debt pricing, even fewer are full on the name."
While debt markets clearly view Ford as below-investment grade, the rating agencies do not. Banc One views its current ratings (Baa1/BBB+) as "a sign the rating agencies are not overly concerned with the firm's near-term survival. Let's face facts: Ford is not Conseco. The risk of Ford going away is very small," concludes Roever.