By Shannon D. Harrington and Keith Naughton March 25 (Bloomberg) -- Ford Motor Co., the biggest issuer of high-yield securities, is “years away” from regaining the investment-grade rating it lost in 2005 even as growing U.S. market share and reduced debt spur a surge in its bond prices, according to Chief Financial Officer Lewis Booth. “We’ve got a lot of steps to go before we get to investment grade,” Booth said yesterday in an interview at Bloomberg’s headquarters in New York. “This is not a months issue. It’s some years away.” While Ford bonds are trading as if they are two steps higher than their B3 rating from Moody’s Investors Service, the company’s $50 billion debt was 13 times earnings before interest, taxes, depreciation and amortization in 2009. Ford is pegging its rebound to a “fragile” economic recovery, Booth said. Ford, the only one of the three largest U.S. automakers to avoid filing for bankruptcy, was the top issuer of junk securities in 2009, raising $4.6 billion via Ford Motor Credit Co., according to data compiled by Bloomberg. The company’s standing with investors has been climbing since early 2009 as it cut $9.9 billion of debt through loan and bond buybacks. Dearborn, Michigan-based Ford’s $1.8 billion of 7.45 percent notes due in 2031, which traded at 15.4 cents on the dollar in November 2008, have soared to 93.3 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield has plunged to 8.1 percent from 48 percent. Aiful Auction Standard & Poor’s raised Ford’s credit rating in November to B-, six levels below investment grade, almost seven months after its previous upgrade. Moody’s boosted Ford March 17, the third increase since September, and said it may lift it higher. Elsewhere in credit markets, traders settling contracts linked to Aiful Corp. set an initial 31.375 percent of face value in the first auction of credit-default swaps in Japan. The price, the result of bidding by 13 dealers including Goldman Sachs Group Inc. and Barclays Plc, means sellers of swaps on Aiful would pay 68.625 yen on 100 yen to settle the contracts, according to data posted on a Web site by auction administrators Markit Group Ltd. and Creditex Group Inc. “The initial result is fair,” said Tomoyuki Hirose, an analyst at Morgan Stanley. “The recovery lock was quoted at 28 percent for bid and 34 percent for offer at the latest.” Aiful’s auction may set a precedent for future events after the consumer lender restructured its debt to avoid bankruptcy. Final values will be decided later today. Kyoto-based Aiful, Japan’s third-largest consumer lender by assets, triggered payouts on the contracts after extending maturities on 280 billion yen ($3 billion) of debt. Portugal Downgrade Banks, hedge funds, insurance companies and other asset managers use credit-default swaps to hedge against losses or to speculate on the creditworthiness of companies, countries or other borrowers. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Swaps on Portuguese sovereign debt rose yesterday after Fitch Ratings cut the government’s credit grade one step to AA- and placed it on a “negative” outlook because the nation’s prospects for economic recovery are weaker than its European Union peers. Five-year contracts on Portugal climbed 4 basis points to 138 basis points, or $138,000 a year to cover securities with a face value of $10 million. Bond Risk Portugal’s deficit is 9.3 percent of gross domestic product, more than triple the EU’s 3 percent limit. Fitch’s downgrade puts it one step below the Aa2 rating assigned to it by Moody’s and a level higher than the A+ rating at S&P. The Markit CDX North America Investment Grade Index of credit swaps climbed 2.6 basis points to a mid-price of 88.6, according to Markit. In London, the Markit iTraxx Europe Index, linked to swaps on 125 investment-grade companies, fell 1 basis point to 78.6. The Markit iTraxx Australia index rose 3.5 basis points to 87 as of 11:48 a.m. in Sydney today, Deutsche Bank AG prices show. The index is heading for its largest increase since Feb. 23, according to CMA DataVision prices in New York. The Markit iTraxx Japan index rose 4.5 basis points to 121.5 as of 8:53 a.m. in Tokyo, Morgan Stanley prices show. The extra yield investors demand to own corporate bonds rather than government debt fell 1 basis point to 153 basis points, or 1.53 percentage point, the narrowest since November 2007, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 4.012 percent. Wal-Mart Sale Wal-Mart Stores Inc., the world’s largest retailer, and Anheuser-Busch InBev NV, the biggest brewer, led about $10 billion of U.S. corporate bonds marketed or sold yesterday. Pacific Investment Management Co. said corporate-bond buyers should upgrade the credit-quality of their investments as economic growth is hampered by higher government debt levels and the unwinding of stimulus programs. Ford managed to avoid the fate of its U.S. competitors by borrowing $23 billion in late 2006 before credit markets froze. The automaker put up all major assets, including the Ford name, as collateral to build a cash cushion to withstand losses while developing new models. Ford’s credit rating is being held back by a debt load that Moody’s calculates to be about $50 billion from its automotive operations, including a $12 billion unfunded pension liability and as much as $5 billion from leases on buildings and equipment, said Bruce Clark, Moody’s senior vice president in charge of rating Ford’s debt. Credit Metrics “We are talking years, not months before Ford would have the kind of credit metrics that would be reflective of an investment-grade rating,” Clark said in an interview. “Their credit metrics are still very weak despite their improving performance.” Ford bonds are trading as if the company were rated B1 by Moody’s, according to the ratings company’s capital markets research group. Ford ended three years of losses in 2009 with net income of $2.7 billion and forecasts a pretax operating profit this year. The company passed General Motors Co. in February to lead U.S. monthly auto sales for the first time since 1998. Ford has sold $2.8 billion in asset-backed securities tied to dealer payments this year through a Federal Reserve program to unlock lending. The Fed’s Term Asset-Backed Securities Loan Facility, or TALF, ended this month. A $1.5 billion bond issue backed by lease payments was sold outside of TALF in January. Ford Headwinds “There are both internal and external headwinds which are going to keep them a solid high-yield credit at least for the next few years,” said Mirko Mikelic, a senior money manager at Fifth Third Asset Management in Grand Rapids, Michigan, who helps manage $14 billion in fixed-income assets. “Slowly, if they get their house in order, they’re going to grind their way back to investment grade.” High-yield, or junk, bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P. “There are some hurdles ahead of us and the most obvious hurdle is, how fragile is the economic recovery?” Booth said. Ford is planning for a “modest recovery,” he said. Ford forecasts U.S. industry-wide sales of 11.3 million to 12.3 million cars and light trucks this year, rising from 10.4 million in 2009, which was the lowest since 1982. The annual average from 2000 to 2007 was 16.8 million. ‘Changed Company’ The company gained U.S. market share last year for the first time since 1995 with new models such as the revamped Taurus sedan while the predecessors of GM and Chrysler Group LLC reorganized in bankruptcy with federal aid. Ford also has trimmed 47 percent of its North American workforce since 2006 and is rolling out fuel-efficient small cars such as the Fiesta. “We’re a changed company,” Booth said. “The test for Ford is to be consistent and predictable in our improvements.” Wal-Mart sold $2 billion of 5- and 30-year senior notes, tapping the U.S. bond market for the first time in eight months, Bloomberg data show. The notes due in 2040 yield 95 basis points more than similar-maturity Treasuries. In July, the Bentonville, Arkansas-based company issued $500 million of 6.2 percent notes due in 2038 in a reopening of an April 2008 offering. Those bonds paid a spread of 130 basis points. Anheuser-Busch InBev sold $3.25 billion of debt in a four- part offering. Proceeds will be used to repay debt and for general corporate purposes. The Leuven, Belgium-based company was formed when InBev BV bought Anheuser-Busch Cos. for $52 billion in 2008. Pimco Recommendations Pimco recommends buying U.S. bank bonds, taxable municipal securities, federally subsidized Build America Bonds and emerging market corporate debt because the credit fundamentals “are stable and improving” in those areas, Mark Kiesel, global head of corporate bond portfolio management, wrote in a report posted on the company’s Web site. “Investors should take advantage of the tighter credit spreads and focus on de-risking their portfolios in order to prepare for the increasing long-term secular headwinds stemming from the growing deterioration in public sector balance sheets,” he said. Yields on Fannie Mae’s current-coupon 30-year fixed-rate mortgage-backed securities climbed 0.17 percentage point to 4.45 percent as of 5 p.m. in New York, the biggest change in percentage terms since Dec. 1 and the highest since Jan. 8, Bloomberg data show. Mortgage-bond yields followed Treasuries’ higher as 10-year interest-rate swap rates, another benchmark, widened their discount to U.S. government debt after the auction produced higher yields than forecast. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Keith Naughton in Dearborn, Michigan, at Knaughton3@bloomberg.net

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