Ford Motor Company Bond Reward To Risk Ratio Narrows

Jan. 15, 2014 7:40 AM ETFord Motor Company (F)2 Comments

In the last few days, Ford Motor Company (NYSE:F) announced its best revenue year since 2006, boosted its quarterly dividend by 25%, and announced an almost 50% sales increase in one of the world's most important markets, China. In spite of this, Ford's stock price has been flat to down since we last looked at the reward to risk ratio on Ford Motor Company bonds on September 13, 2013. Moreover, default probabilities for Ford Motor Company have risen. This note uses the default probabilities and bond spreads of Ford Motor Company on January 13, 2014, to update the relative reward-to-risk ratio on the firm's bonds.

We conclude that a narrow majority of analysts would rate Ford Motor Company bonds as investment grade and that the reward to risk ratio on Ford bonds has narrowed to below average levels. We explain our conclusions in the remainder of this note.

The Analysis

A total of 160 trades were reported on 15 fixed-rate non-call bond issues of Ford Motor Company with trading volume of $14.9 million. We leave for another day an analysis of spread on the bonds of Ford Motor Credit Co. LLC, whose credit spreads are dramatically lower than Ford Motor Company's spreads.

Assuming the recovery rate in the event of default would be the same on all bond issues, a sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis. In this note, we also analyze the maturities where the credit spread/default probability ratio is highest for Ford Motor Company. Lastly, we opine on the consensus judgment of whether or not Ford Motor Company bonds are investment grade in light of the revised definition of that term under the Dodd-Frank Act of

This article was written by

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Donald R. van Deventer is a Managing Director in the Center for Applied Quantitative Finance at SAS Institute, Inc. Prior to the acquisition of Kamakura Corporation by SAS on June 24, 2022, Dr. van Deventer was the Chairman and Chief Executive Officer of Kamakura Corporation. He founded the Kamakura Corporation in April, 1990. The second edition of his book, Advanced Financial Risk Management (with Kenji Imai and Mark Mesler) was published in 2013.  Dr. van Deventer was senior vice president in the investment banking department of Lehman Brothers (then Shearson Lehman Hutton) from 1987 to 1990. During that time, he was responsible for 27 major client relationships including Sony, Canon, Fujitsu, NTT, Tokyo Electric Power Co., and most of Japan's leading banks. From 1982 to 1987, Dr. van Deventer was the treasurer for First Interstate Bancorp in Los Angeles. In this capacity he was responsible for all bond financing requirements, the company’s commercial paper program, and a multi-billion dollar derivatives hedging program for the company. Dr. van Deventer was a Vice President in the risk management department of Security Pacific National Bank from 1977 to 1982. Dr. van Deventer holds a Ph.D. in Business Economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration. He was appointed to the Harvard University Graduate School Alumni Association Council in 1999 and served through 2021. Dr. van Deventer was Chairman of the Council for four years from 2012 to 2016. From 2005 through 2009, he served as one of two appointed directors of the Harvard Alumni Association representing the Graduate School of Arts and Sciences. Dr. van Deventer also holds a degree in mathematics and economics from Occidental College, where he graduated second in his class, summa cum laude, and Phi Beta Kappa. Dr. van Deventer speaks Japanese and English.

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