A Key Borrowing Spigot Opens for Ford
July 10 2017 - 8:29AM
Dow Jones News
By Katy Burne
A handful of investors recently began extending short-term loans
to an affiliate of Ford Motor Co. after more than a decadelong
hiatus, opening a key borrowing spigot for the blue-chip auto
maker, which was locked out of money markets in the last
recession.
In recent months, a money-market fund of Federated Investors has
been buying a kind of short-term IOU called "commercial paper" from
Ford Motor Credit Co. LLC. The Federated Capital Reserves Fund now
holds about $148 million of debt, according to fund tracker Crane
Data.
Ford Motor Credit has made a comeback since being struck off
Federated's eligible investments list in 2003, when the
vehicle-financing company showed signs of struggling and was later
downgraded to below-investment grade. It has since been upgraded to
investment grade.
The Federated holding, while small, is notable because it
signals a potential thaw in relations between money funds and auto
companies that could later benefit others, including General Motors
Co. and Fiat Chrysler Automobiles NV. GM and Chrysler Group LLC
filed for bankruptcy in 2009.
"Autos are generally tied to the consumer, and the consumer, we
think, is very healthy right now," said Debbie Cunningham, chief
investment officer for money markets at Federated in Pittsburgh
She said auto loans are generally the highest priority payment
for consumers, behind mortgages, and thus offer a solid investment
for funds willing to consider issuers in the lower tier of the
highest short-term rating categories.
Robert Cheddar, portfolio manager at PFM Asset Management LLC,
which manages about $63 billion on behalf of state and local
governments, said Ford's fundamental condition has improved. For
clients that will allow it, he started buying the company's
commercial paper last year.
Ford Motor Credit had $4.98 billion of commercial paper as of
March 31 and is "a much stronger credit" today, said Stephen Brown,
senior director at Fitch Ratings. Last May, Fitch upgraded the
issuer's commercial paper program to F2, equivalent to the second
lowest rung of investment grade, from F3.
Ford Motor Credit declined to comment.
The interest from Federated reflects the yield offered on the
debt -- about 1.3%, above what is available on short-term Treasurys
and bank commercial paper -- as well as Ford's progress in
returning to better health.
It also points to an increasing appetite among large money
managers using separately managed accounts to oversee client money.
Crane Data calculates that separately managed accounts have grown
by as much as $40 billion to $500 billion since new Securities and
Exchange Commission rules for traditional money-market funds came
in last October.
"It's mostly separate accounts and corporate investors that are
buying [Ford's commercial] paper," said Mr. Cheddar at PFM.
Commercial paper, which is typically issued anywhere from
overnight to 270 days, is generally considered one of the cheapest
forms of borrowing because most issuers have high credit ratings
and investors loan their cash over short periods.
Most money funds never buy commercial paper rated below the top
rung of investment grade. But the new SEC rules removed rating
requirements for money-market funds. Previously, funds were
required to invest at least 97% of their assets in securities with
only the highest short-term credit ratings.
In 2016, Ford tapped the longer-term debt markets for the first
time in nearly four years, raising $2.8 billion. While Ford Motor
Credit was locked out money markets in the financial crisis, it
used other sources of funding such as selling bonds backed by
future revenues from car loans, as well as credit facilities from
banks.
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
July 10, 2017 08:14 ET (12:14 GMT)
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