Ford Motor Credit Company (F) ("FMCC") was in the debt market again today, issuing $750 million in 3.5 year debt. The following are the issue details:
|Issuer||Ford Motor Credit Company LLC|
|Maturity||January 15, 2016|
|Interest Payment Dates||Semi-annually on each January 15 and July 15|
|Call||No par call prior to maturity|
- Limitation on Liens - Should FMCC pledge/lien any property in excess of $5MM (with certain exceptions), debt will be secured equally and ratably. For a financial entity, this does not mean much.
- Merger and Consolidation - No consolidation or merger of Ford Credit, 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 any asset of Ford Credit would become subject to a Mortgage, unless the debt securities shall be equally and ratably secured. Again, no merger if assets become subject to a merger - no real bite for a credit company.
Ford Motor Credit Outstanding:
|3.875% due 1/15/2015||$1,250||$104.04||2.17%|
|5.625% due 9/15/2015||$1,000||$109.00||2.60%|
|2.50% due 1/15/2016||$750||$99.68||2.60%|
|6.625% due 8/15/2017||$1,250||$114.00||3.56%|
|5.0% due 5/15/2018||$1,950||$106.83||3.67%|
The 6.625% due 8/15/2017 appear more attractive than the new issue as you pick up 90bps for 18 months versus the 43bps for the 3.875% '15 into the new deal. This is due to the premium being paid although an investor is going into a bigger, more liquid deal.
A brief financial summary of FMCC's Q2 2012 and H1 2012 financial performance shows a weaker financial environment, but one consistent with Ford's view resulting from slower global growth, especially in Europe and Brazil.
Importantly, within the finance receivables portfolio, the recorded investment of consumer receivables in non-accrual status was $368 million, or 0.8% of consumer receivables, at March 31, 2012, and $402 million, or 0.9% of consumer receivables, at December 31, 2011.
As well, the outstanding recorded investment at time of modification for consumer receivables that are considered to be TDRs (troubled debt restructurings) was $63 million, or 0.1% of Ford Credit's consumer receivables during the period ended March 31, 2012 and $119 million, or 0.3% of Ford Credit's consumer receivables, during the period ended March 31, 2011. A subsequent default occurs when contracts that were previously modified in TDRs within the last twelve months and subsequently had past due payments that resulted in repossession. The subsequent annualized default rate for consumer contracts was 6.1% of TDRs during the period ended March 31, 2012. Ford is trying to manage its troubled loans to consumers and, thus far, has done a decent job of controlling the increase in troubled debt.
As the chart below shows, FMCC's pre-tax profit evolution has been affected by lease residuals, which have plagued auto finance companies for some time now. In order to attract buyers with a low lease rate, the residual value has to be larger (to keep up-front costs lower as well) which is affected by used car values and sales. I would not expect this to change in the near-term, but FMCC has done a decent job controlling their risk. As well, pre-tax earnings have been affected by fewer lease terminations, which resulted in fewer vehicles sold at a gain, and lower financing margin. The financing margin is somewhat beyond the company's control as the curve is somewhat flat from a financing perspective.
Ford Credit continues to expect full year pre-tax profit of about $1.5 billion, and total distributions to its parent of between $500 million and $1 billion. Ford Credit now projects managed receivables at year end to be in the range of $85 billion to $90 billion, and managed leverage of 8-9:1 for the foreseeable future, which is a decrease from the prior target of 10-11:1 and is consistent with its goal of achieving and maintaining a strong investment grade balance sheet.
Bottom Line: I continue to like Ford's prospects and believe full investment grade by all rating agencies is forthcoming. FMCC has managed the current low growth environment well, by controlling the amount of troubled debt restructurings and the growth of non-accruing loans. While from an absolute basis, many investors will not find the debt of FMCC compelling, from a relative basis it is hard to find an investment grade non-financial entity that offers a similar spread. As well, given the outlook for short rates in the next few years, the rate risk involved in this investment is not a significant risk while the roll down (3.5yrs to 2 yrs) over this period will help support performance.
Disclosure: I am long F.
Additional disclosure: 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.