By Patrick McGee
Ford Motor Co. (F) bond prices soared late Tuesday after the automaker received another ratings upgrade that officially places the automaker in the investment-grade universe.
Moody's Investors Service lifted Ford one notch to Baa3, following a one-notch upgrade from Fitch Ratings last month. With two investment-grade ratings, Ford's bonds will now depart from their seven-year stint in the high-yield universe.
Barclays is likely to move Ford's bonds from its U.S. corporate high-yield index to its investment-grade index sometime this week, sources said. That will force portfolio managers who track the benchmark indexes to follow suit. Ford is the largest constituent in the high-yield index, representing nearly 3% of its volume, a Barclays spokesman said via email.
Ford's most actively traded bond soared in price, with yield plummeting about 100 basis points, according to MarketAxess. Ford Motor Credit Co. 3.875% bonds due 2015 jumped $3.50 per $100 of face value to $104; the spread to comparable Treasurys, or risk premium, declined 108 basis points to just 189, the lowest since it was issued. A basis point is one-hundredth of a percentage point.
The buying reflects institutional investors who couldn't own the bonds previously now rushing in, as well as investors "trying to catch the wave of this trigger event," said Jody Lurie, corporate credit analyst at Janney Montgomery Scott.
The question is now whether Standard & Poor's will "finally act to make the company fully investment grade," she added.
In Tuesday's upgrade, Moody's cited its strength in North America, its strong liquidity position, and its sound financial discipline.
Ford had expressed confidence in an upgrade more than a year ago when it began selling a kind of debt whose value was predicated, in part, on positive rating actions.
The auto company developed an unusual structure to bridge the broader reach of the corporate bond market with the asset-backed market, where it could achieve an investment-grade rating with a secured pool of auto loan receivables. Known as Ford Upgrade Exchange Linked notes, or FUEL debt, the bonds were structured to convert to corporate debt in the event Ford was pushed up to investment grade by at least two of the major rating firms.
The yield spread premium on one FUEL bond with a 4.207% coupon maturing in 2016 narrowed by 30 basis to 210 basis points after Tuesday's upgrade, according to one investor, citing a dealer. The ask price on the bonds jumped to $104.90 from $103.85. The bonds trade in the private-placement "Rule 144A" market, where trading data is less transparent.
The FUEL bonds began showing up in secondary trading on April 24 when Fitch Ratings raised its grade on Ford, though they didn't trade then, according to Asset Backed Alert.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; [email protected]