As any investor in finance companies knows, a company must be able to raise funds at lower rates than it lends it (the positive margin approach). When a finance company is troubled, and the unsecured markets are not open to it, the company has two main choices to raise funds and keep a positive margin: raise secured funds (either by banks or public markets, but mainly banks) or issue asset-backed securities collateralized by their receivables. Neither of these approaches is ideal and finance companies try to avoid relying on them.
Ford Motor Credit Company, the financial services arm of Ford (F), has been in a tough spot since 2008 when the Big Three looked they were going to shrink to the Big One (the "one" being Ford). Debt raised in public markets was expensive and there is a limit to how much secured debt and ABS a company can do without raising both eyebrows and concerns. A sign of health in any company (finance or not) is the ability to raise unsecured debt in the public markets at a reasonable cost.
Ford Motor Credit Company showed these healthy signs when it raised $1.5 billion of 3% five-year debt (see the prospectus).
The Details
| Issuer | Ford Motor Credit |
| Size | $1,500,000,000 |
| Coupon | 3.0% (+230bps) |
| Maturity | June 12, 2017 |
| Ratings | Baa3/ BB+/ BBB- |
| Call Date | Non-callable |
| Payment Dates | June 12 and December 12th |
| Use of Proceeds | General corporate and financing purposes |
| CUSIP | 345397WD17 |
Covenant:
Merger and Consolidation: The Indenture provides that no consolidation or merger of Ford Credit with or into any other corporation shall be permitted, and no sale or conveyance of its property as an entirety, or substantially as an entirety, may be made to another corporation, if, as a result thereof, any asset of Ford Credit or a Restricted Subsidiary would become subject to a Mortgage, unless the debt securities shall be equally and ratably secured with (or prior to) the indebtedness secured by such Mortgage.
The Issuer
Ford Credit offers a wide variety of automotive financing products to and through automotive dealers throughout the world. The predominant share of our business consists of financing Ford vehicles and supporting Ford's dealers. We earn our revenue primarily from:
-- Payments made under retail installment sale and lease contracts that we originate and purchase;
-- Interest supplements and other support payments from Ford and affiliated companies on special-rate financing programs; and
-- Payments made under wholesale and other dealer loan financing programs.
As a result of its financing activities, Ford Motor Credit has a large portfolio of finance receivables and leases that are classified into two segments: consumer and non-consumer.
- Finance receivables and leases in the consumer segment relate to products offered to individuals and businesses that finance the acquisition of vehicles from dealers for personal and commercial use.
- Finance receivables in the non-consumer segment relate primarily to products offered to automotive dealers.
Pricing
This deal follows on the heels of the $1.25 billion three-year deal done at the end of March, where the company raised funds at 2.75% or approximately +235/three years (CUSIP: 345397WC34).
It may not seem like much of an improvement after getting another rating agency to christen the company investment grade, but it just raised five-year money at the same risk premium as its earlier three-year deal. When viewed in this context, you can see things are moving in the right direction.
Bottom Line
Ford Motor Credit is now raising unsecured funds at attractive levels (for both the company and the investors). I would expect that the issues will tighten further once all three agencies are on board. Given the option, however, I would prefer to be Ford Motor Company as it has been given a release of liens from its banks and is the largest beneficiary of increased profitability at FMCC. The problem with Ford Motor bonds is premium. It is hard to find Ford bonds below $110. While many will argue that as long as Ford does not look like it will go bankrupt, the premium shouldn't be a concern. While true in theory, many people and institutions are premium averse and premium securities trade at a discount to par/near par securities. So if you want to sell them after they tighten in, you could get dinged with the premium bond discount de jour, affecting your returns.
As an aside, Ford CORTS 7.40% (KSK) has been called and it looks like the call date will be June 19.
Disclaimer: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.
Disclosure: I am long F. I am also long KSK for another eight days.
