Credit analyst says wait for automotive sales turnaround before buying Ford

By Ronda Fears

Nashville, March 17 - Despite the recent panic in the capital markets over the creditworthiness of Ford Motor Co. (Baa1/BBB), Carol Levenson, director of research at Gimme Credit, urged investors to resist buying the paper on weakness.

"We believe the liquidity issue has been put to bed for now, but we would not recommend this paper even at current weak levels until we see a sustained automotive turnaround," Levenson said in a report Monday.

In commenting on Ford's fourth quarter results in late January, Levenson said she noted continuing weak operating results and market share performance, but didn't see any imminent liquidity problems.

"We still don't, but we would urge management to present both a Plan A and a Plan B to the credit markets regarding the $42 billion in debt maturing this year," she said in the report.

Ford's main funding channel is securitization of its finance receivables. Securitization proceeds more than doubled in 2001 to $40 billion and stayed at this level in 2002.

At the same time, issuance of unsecured term debt dropped precipitously to $13.5 billion in 2002 from $40 billion in 2001.

"The spreads tell the tale," Levenson said.

"Ford says since 1998 the spread it has paid on its asset-backed securities ranged from 38 to 110 basis points. During the same period, spreads on its unsecured term debt ranged from 46 to 662 basis points, with the high end of this range skyrocketing from 264 basis points in 2001 to 662 basis points last year.

"Imagine the hit to Ford's profitability if it were forced to pay this extra 550 basis points - the difference between the asset backed spread and the unsecured term debt spread - at refinancing time.

"Ford had better hope there is no disruption in the asset-backed market, and that the quality of its receivables remains relatively high."

She noted $54 billion in receivables matures this year, and even assuming a massive haircut for net charge-offs, this exceeds the company's short-term debt.

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