Ford’s Newest In Long Line Of Bonds

ford bondsFord Motor Company and Ford Motor Credit Company have issued several new bonds in the past 6 months. Ford Motor Credit Company’s newest issue includes 5-year corporate bonds (listed as call protected) dated March 28, 2013 and callable 10-year bonds dated March 21, 2013. The newest 10-year bonds have a 3.75% coupon, versus the 3.65% coupon on 10-year Ford Motor Credit bonds issued last month. The new Baa3 rated 5-year Ford bonds should have an annual yield 370% greater than the current 0.81% 5-year U.S. treasuries.

  To see a list of high yielding CDs go here.  

Here are a few of the Ford Motor Company and Ford Motor Credit bonds currently on the secondary market:

dated date  -
first coupon
price yield
Ford Mtr Co Del Deb 7.75% 2043 (cusip: 345370BM1) 06/15/1993 12/15/1993 $118.42  6.36%
Ford Mtr Co Del Nt 4.75% 2043 (cusip: 345370CQ1) 01/08/2013
07/15/2013
$95.20  5.06%
Ford Motor Credit Company Fr 3.75% 2023, Survivor Option, Call 03/20/14@Par (cusip: 34540TEH1) 03/21/2013
09/20/2013
$98.90  3.88%
Ford Motor Credit Co LLC Nt 4.25% 2022 (cusip: 345397WF6) 09/25/2012
03/20/2013
$103.62  3.79%
Ford Motor Credit Company Sr Nt 3.65% 2023,Survivor Option Call 02/20/14@Par (cusip: 34540TEA6) 02/14/2013
08/20/2013
$99.10  3.75%
 Ford Motor Credit Company Fr 3% 2018,Survivor Option (cusip: 34540TEK4) 03/28/2013
09/20/2013
 $100.00  3.00%

While some investors avoid bonds priced over par, notice the 25% difference in yield between the top two 2043 Ford Motor Company bonds in this list. Whereas it would take 2 and a half years for the 7.75% Ford bonds to recoup their premium, the newer 30-year bonds issued in January 2013 are currently priced under par.

Take a look at the new 5-year bonds’ coupon schedule compared to the old 50-yr Ford Motor Company bonds due in 2043:

 Ford Motor Credit 3% 2018 semiannual payments  Ford Motor Co. 7.75% 2043 semiannual payments
Sept. 2013   $15 Jun. & Dec. 2013  $38.75 / $38.75
Mar. & Sept. 2014  $15 / $15 Jun. & Dec. 2014  $38.75 / $38.75
Mar. & Sept. 2015  $15 / $15 Jun. & Dec. 2015  $38.75 / $38.75
Mar. & Sept. 2016  $15 / $15 Jun. & Dec. 2016  $38.75 / $38.75
Mar. & Sept. 2017  $15 / $15 Jun. & Dec. 2017  $38.75 / $38.75
Mar. & Sept. 2018  $15 / $15 Jun. & Dec. 2018  $38.75 / $38.75
total  $165 total  $465 (subtract $184 to account for premium) = $281

Keep in mind the 50-year Ford bonds issued in 1993 are currently priced at $118.42, they also have accrued interest, and do not mature until 2043; whereas the newer bonds have little accrued interest and should mature in 2018.

When Low Interest Rates Meant 5.5% On The 10-Year

Check out what interest rates on 10-year treasury notes were doing when the 50-year Ford bonds were issued. The point in the graph below is on 5.4%, during the summer of 1993, when these bonds were issued:

10-year-interest-rates

Source: Yahoo! Finance

Of course today a lot has changed; rates are much lower, inflation has taken its toll — and Ford’s credit rating dropped from A1, where it was in the mid-1990s. In fact the company only recently was upgraded back to investment grade. On top of that, Ford is taking on loads of debt, though Ford Motor Credit Company has the potential to receive higher interest rates from customers obtaining car loans, the 2012 annual report shows a $707M decrease in pre-tax results compared to 2011:

“The decline is more than explained by fewer leases being terminated, which resulted in fewer vehicles sold at a gain,  and lower financing margin, as higher yielding assets originated in prior years run off.

The report also shows a $606M decrease in pre-tax results, from 2010 to 2011. This is certainly disconcerting to investors hoping to see growth in the Ford Motor Credit Company business. The prospectus explains:

“We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle…

We completed our full-year 2012 funding plan, issuing over $23 billion of public term funding. Our public unsecured issuance was over $9 billion, including over $700 million issued under the Ford Credit U.S. Retail Notes program. We also issued our first public investment grade unsecured debt transaction since 2005. Additionally, we launched an unsecured commercial paper program in the U.S., which has grown to about $1.7 billion.

Our liquidity remains strong and we ended the year with $19.7 billion of available liquidity and $31.5 billion of committed capacity, compared with about $17 billion and $33 billion at December 31, 2011, respectively.

Though the annual report is upbeat, the fact is the automotive industry is complex. In order to determine what sort of allocation might work, lets look at the current Ford yields compared to the mid-1990s, and at an example of bond allocations by credit quality.

Times Have Changed:  7.75% in 1993 Does Not Equal 7.75% in 2013

According to the Bureau of Labor Statistics inflation calculator:

  •      $10,000 in 1993 had the same buying power as $16,066 today
  •     Ten of the Ford bonds issued in 1993, paid $775 in 1994, which had the buying power of $1,214 today

In order to achieve the same buying power in 2013 an investor would need to buy 15 or 16 of the 2043 Ford bonds. This illustrates the effect of inflation, and underscores the fact that 7.75% literally does not equal 7.75% over time.

Because Ford is rated one notch above junk, the company continues to offer bonds that yield far more than U.S. treasuries. Some investors have confidence in Ford; though the credit rating should not be taken lightly. Though many investors have little to no exposure to fixed income, others follow an allocation strategy such as 60% stocks, 40% bonds. Given today’s ultra-low rates, and the possibility of rising rates, new investors might consider not jumping into a 60/40 allocation all at once.

Allocation By Credit Quality

Allocation is important to every investor’s portfolio, and it makes sense to further define allocation to bonds by credit quality. An example might look like this:

portfolio size high grade (Aaa – Aa3) upper medium grade (A1 – A3) lower medium grade (Baa1 – Baa3) non-investment grade, speculative (Ba1 – Ba3) highly speculative (B1-B3) total / %
$50,000 $2,500 / 5% $3,500 / 7% $3,500 / 7% $2,500 / 5% $2,500 / 5% $14,500 / 29%
$200,000 $14,000 / 7% $14,000 / 7% $14,000 / 7% $14,000 / 7% $10,000 / 5% $66,000 / 33%
$500,000 $35,000 / 7% $35,000 / 7% $35,000 / 7% $35,000 / 7% $35,000 / 7% $175,000 / 35%

Since the Ford bonds listed at the beginning of this article are rated Baa3, they could satisfy a portion of the “lower medium grade” allocation in the chart above. Note, this is an example; investors can and should tailor the chart to meet their needs; though from my experience most investors do not have such a chart, and it could be helpful. (To view a printable, blank template of this chart click here.)

It is possible to use one company’s bonds to satisfy the allocation in the above chart, though diversification is very important. First of all, a bond’s credit rating can be upgraded or downgraded. If you’ve invested in two or three different companies, or in a diversified bond fund that is weighted towards one credit quality; you can try to ease the risk that a credit downgrade will throw the balance off.

In addition to strategic emphasis on credit quality, investors should consider a maturity schedule that works for their personal objectives. Some investors do not want anything that matures over 10-years from now, while others have shorter or longer durations in mind. Here is an example portfolio that centers on the new 5-year Ford Motor Credit bonds and the old 50-year Ford Motor Company bonds issued in 1993:

portfolio size intermediate-term treasury fund upper medium grade weighted bond fund 7.75% Ford Motor Co. 2043 / 3% Ford Motor Credit 2018 high yield income fund total / %
$50,000 $1,500 $2,000 $2,400 / $1,940 $1,000 $8,840 / 17.6%
$200,000 $1,750 $2,500 $3,600 / $3,880 $1,500 $13,230 / 6.6%
$500,000 $2,000 $3,000 $6,000 / $5,820 $2,000 $18,820 / 3.7%

Notice the Ford bond allocation in the $50,000 portfolio exceeds the 7% in the first example. Additionally the allocations to the bond funds, in this example, leave room for further investment in different funds or individual bonds, to reach the levels shown in the first example.

In fact I would further diversify this schedule, and choose more than one fund to satisfy some of the credit quality allocations. The simple reason for this is I have seen many individual companies, and funds under perform over the years. I have found that exposure to more and more companies can potentially reduce risk. I like Ford, because they managed not to go into bankruptcy when times got tough, however, they are certainly not risk-free.

If you have any thoughts on Ford bonds or the examples in this article please leave a comment below.

Disclaimer: This article is not a recommendation to buy or sell, please consult a financial adviser to determine proper allocations (if any) to meet your financial objectives. I am long Ford Motor Company bonds, and am considering Ford Motor Credit Company bonds — however, do not currently hold any.

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