US CREDITFord debt faces more weakness as economy worsens
By Karen Brettell
NEW YORK, March 17 (Reuters) - Credit protection costs on
Ford Motor Co (F.N: Quote, Profile, Research) and its finance arm have jumped as a
deteriorating economy and a tighter lending environment
increase concerns about the auto maker’s capacity to move
cars.
With no end in sight to tightening credit conditions, and
large unknowns about how long a recessionary environment will
last, its debt is likely to weaken further.
The cost to insure the debt of Ford and Ford Motor Credit
for five years rose by one to two percentage points each on
Monday, to around 25 percent and 22.75 percent the sum insured
as an upfront payment, respectively.
This means it would cost $2.5 million upfront to insure $10
million of Ford’s debt for five years, and $2.275 million
upfront to insure Ford Motor Credit, plus $500,000 in annual
payments.
“The biggest risk to Ford Motor Credit valuations remains
the overall market, which we expect will continue to weaken,”
Credit Suisse analyst Mark Altherr said in a report. Altherr
changed his recommendation on Ford Motor Credit’s debt and
default swaps to “underperform,” from “outperform.”
“We expect a much lower level of auto sales to further
depress expectations for Ford, driven by increased speculation
of its viability in an extended downturn,” Altherr said.
That Ford’s default swaps are trading at an upfront cost
also indicates perceptions of distress at the firm.
The contracts typically start trading on an upfront basis
when concerns grow that a default is more likely, as sellers of
protection grow nervous that a default could happen before they
receive the quarterly premiums for the insurance.
Ford Motor Credit has strong liquidity to ride out weakness
in the near term, but an extended and severe economic slowdown
could pressure its finances, Altherr said.
“Ford Motor Credit depends on its cash as well as private
and public financings both secured and unsecured,” he said.
“Should this access be unavailable, and it increasingly
appears shaky, we expect that Ford Motor credit will use its
cash as well as maturing receivables to make new loans.”
And this will create a larger problem for parent Ford, as
Ford Motor Credit will be less able to finance new car
purchases, he said.
Under the worst case scenario that the economy heads into a
depression extending through to 2010, and the finance company
suffers a loss rate of 20 percent on finance receivables and
operating leases, Ford could face insolvency. Though this is
not Altherr’s base assumption, he said.
“From a fundamental standpoint you could easily argue that
spreads have overshot,” said another analyst who declined to be
named.
Relative to higher rated credits, however, Ford’s debt
spreads seem fair.
“When people are more concerned about meeting every day
expense requirements the last thing they are thinking about is
buying a car,” he said.
