C.M.O. 6.09.2009
Credit Market Overview
June 9, 2009
In support of the cynically tinged axiom that “No good deed goes unpunished” I offer you Ford Motor Co. (F).
With both GM and Chrysler now wards of the state and the recently dismembered finance arm of the first making loans for both, the bond holders of the latter won a temporary stay of execution by the U.S. Supreme Court yesterday blocking the sale of the company to Fiat only for as long as it takes for the merits of their arguments to be evaluated.
It should not go unnoticed that the merits of their arguments are also the merits of the capital structure that has guided corporate finance in this country and the world for centuries. But who really needs a silly thing like capital structure when the new world order, at least in these fifty states appears to be “from each according to his ability to each according to his need”.
Lest we not leave any of the spare parts unattended GMAC, which if General Motors is now euphemistically called Government Motors should more rightly be considered a GSE and move into the ranks of Fannie and Freddie, sold its first government-guaranteed note recently that consisted of a three-year fixed rate note yielding 2.247% and came at 80bps off Treasuries and a billion dollar chunk of three-year floating rate notes that came at 3-month LIBOR which was set at 0.63688% on the day of issue. For anyone that didn’t just live through the worst credit crisis in history LIBOR is the rate at which banks lend to each other.
Not to get too far off track here but three year CDS level for GMAC was 770bps on June 4th so having Uncle Sam as a co-signer saved GMAC 690bps on the fixed rate piece and a tad of 700bps on the floater.
Back to poor Henry’s car company. Alan Mulally has worked over the past three years to “right size” Ford reducing head count by 40,000 and closing 17 plants; cutting costs by more than $5BN according to the WSJ, as it also works to bring new models to the public. The problem is that it has lost $30BN since 2006 and lugs around $33BN in debt including health and pension benefits.
To put this in perspective, Ford recently issued an 8% note maturing in 2014 that came at approximately 950bps off of the associated Treasury note. That is 870bps worse than GMAC was able to issue on its fixed rate note and 886bps worse than the cost of the floating rate piece. In CDS land, at the corporate level Ford’s spread is 1699bps and the finance arm’s spread was 798 at last night’s close.
As all of this jockeying goes on between what used to be called the “Big Three” there are some questions as to the futility of it all as the world’s host to the most recent Olympics can also boast that their car plants shipped more cars than any other manufacturer in the world in the first four months of this year and are on schedule to produce a total of 10.8MM units this year vs. a total of 10MM for all three U.S. manufacturers combined according to Assif Shameen in Barron’s recently and that is without Hummer ’s help.
April car sales in China were 35% higher, year on year just as sales in the U.S. came in 40% lower. Inventories support this story as cars in China are going straight from the factory to the consumer leaving few if any cars in inventory while auto inventories in the U.S. and Western Europe are at all time highs.
It will be interesting to see if the old Ford can compete with the GM and Chrysler (new here meaning sans debt, healthcare and pension benefit liabilities). It will be equally, if not more interesting to see if it matters as China demand for automobiles grows at a blistering pace. This should also give pause to those who claim there is no consumer demand inside “The Middle Kingdom”.
Enjoy the week.
Jim Delaney
