Here’s why corporate debt investors might want to consider downgrading Ford to ‘trash’


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Moody’s decision to downgrade Ford’s debt to “junk” rating “ sounded the alarm among investors who were nervous about over-leveraged US companies losing their coveted investment ratings.

But it is their less creditworthy counterparts who may need to worry if Ford receives another downgrade by rating agencies S&P or Fitch and officially pushes the automaker off quality bond indices. The sudden entry of a large transmitter like Ford F,
-0.38%
in the high yield bond market could weigh on the prices of junk corporate credit.

The US automaker’s $ 35 billion plus debt is said to be about 3% of the high yield bond index. If another rating company downgraded Ford, it would become the fifth largest “fallen angel” or high yield issuer when classified as investment grade.

Analysts cite 2005 as an example of how fallen angels could overwhelm demand as investors struggle to absorb the bonds of the newcomer to the high yield market.

At the time, the problems of the American auto industry caused General Motors and Ford to lose their investment grade status. The junk bond market was choked by the influx of offers as the total outstanding debt issued by the two companies exceeded more than 12% of the overall market.

Therefore, Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors, estimated the downgrade of General Motors and its subsidiaries alone had caused high yield credit spreads to widen by 50 points in 2005.

In other words, the additional premium demanded by investors in exchange for owning a basket of bad bonds over comparable US Treasuries had increased by an additional 50 basis points.

So far, investors have mainly focused on the $ 3 trillion of premium BBB-rated debt that is about to be downgraded to junk, and may need to be sold by conservative investors such as pension funds and insurance companies that are not allowed to hold debt. from high yield issuers.

But Hans Mikkelsen, head of investment grade US bond strategy at Bank of America Merrill Lynch, said Ford’s downgrade was more of an outlier in a largely improving story for the BBB-rated market.

“We think Ford’s situation is idiosyncratic and makes little sense for the BBB rated segment of the IG market where companies are less cyclical and use levers (cut dividends, sell assets, etc.) to defend their ratings. IG, ”Mikkelsen said.

See: Ford’s debt rating downgraded to junk by Moody’s

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Carol M. Barragan

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