The first-of-its-kind transaction is backed by an asset-backed security that itself is backed by a pool of auto loan receivables, with a contingent exchange feature. The deal enables Ford to tap the investment grade market with a Baa2, BBB-minus-rated deal, rather than doing an unsecured offering rated at its current senior unsecured bond rating of Ba2/BB-minus.
The FUEL deal attracted about USD6bln of demand, largely from investment-grade bond buyers who have not been able to gain exposure to Ford, which by itself is a sub-investment grade credit. Traditional ABS investors were also said to have been involved; attracted by the roughly 40 basis point pick up of the notes offered over comparable Ford ABS on a swapped-to-fixed basis.
The overwhelming demand for the deal, which has an 'expected' bullet maturity at five years, enabled bookrunners Bank of America Merrill Lynch (structurer), Citigroup and Goldman Sachs to increase the size from an initial USD1bln, priced at Treasuries plus 200 bp, 10bp tighter than its Treasuries plus 210bp guidance and then see it trade in to around 189bp over in the gray market.
"It's a ground-breaking structure," said Felix Hu, senior analyst at Moody's Investors Service. "Although it's a passthrough security based on the underlying receivables of an asset backed note, it includes features that you would only see in a corporate bond, such as make-whole payments, step-up payments and a soft five-year bullet" maturity.
The last time Ford could have tapped the corporate market with a high grade rating from all three agencies was May 2005. Once one of the premier names in high grade land, Ford dipped all the way into the triple-C category during the depths of the crisis before bringing itself back into double-B territory where it currently sits.
None of the bookrunners would comment on the deal.
Investors who looked at the deal, however, said that while the structure was complicated, it was a name that now had rarity value for high grade buyers.
"If you couldn't buy non-investment grade and you think Ford will do well, then you wanted to be in this deal. We were involved," said one investor based in New York.
"It's a very unusual move on Ford's part, trying to bring out their ABS investors as well as their high-grade investors at the same time," added Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, based in Grand Rapids, Michigan. He said he did not participate in the deal because he wanted more time to review the structure.
The deal has multiple outcomes, depending on what happens to Ford's rating.
The FUEL trade is secured by the asset-backed note known as Ford Credit Auto Owner Trust 2011-SRR1, which is a securitization of a revolving pool of prime auto loans receivables originated in the US.
Although marketed as a five-year bullet, five years is the "expected final payment date". The actual final maturity date is not until October 2022.
The outcome everyone involved hopes for is for Ford be upgraded by two of the three major rating agencies, Moody's, Standard & Poor's or Fitch Ratings to investment grade, which is at least Baa3, BBB- or BBB- respectively. At that point the FUEL notes mandatorily exchange into Ford Credit senior unsecured notes with the same maturity and coupon of the initial FUEL notes.
If Ford does not reach investment grade by its soft bullet maturity in 2016, then the bond coupon steps up and it starts a turbo-charged amortization of principal. The maturity then extends out to 2022. At this point Ford can elect to sell the ABS notes and use the proceeds to completely pay off all of the FUEL notes.
The ultimate pricing level on the FUEL notes came inside where Ford (Ba2/BB-) would likely do a new senior unsecured bond. The most recent Ford deal - the F 5.625s of 9/15/15 were quoted at around 200/190 ($105.66; G+226; Z+209bp). So if a new Ford senior unsecured would need about 10bp new-issue concession, this would put a new Ford 5yr around Treasury plus 236bp (G spread plus 10bp NIC).
That said, the savings achieved by selling the FUEL note is not tremendous for Ford, which makes the new security seem like more of an investor diversification exercise. Investors said the deal was basically pitched as an opportunity that would allow those who can only invest in high-grade securities, and therefore cannot buy Ford at its current rating, to participate in what will likely be a decent rally as Ford climbs the credit spectrum back into high-grade land.
The pricing on today's FUEL note already seemed a bit aggressive compared to where recent triple-B auto financing bonds priced and are trading - although the most recent trades are Yankees, sold by overseas manufacturers, which sometimes require a bit more premium than those from domestic issuers. The financing arm for French carmaker Renault priced a deal on April 5. The RENAUL 4.60s of 4/12/16 (Baa2/BBB) priced at Treasuries plys 235bp and was quoted 230/220 today. The financing arm for Peugot priced a deal on March 28 (Baa1/BBB). The 5yr tranche - the PEUGOT 4.375s of 4/4/16 priced at Treasuries plus 225bp and were quoted 233/223 today.
Observers noted that the pricing on the Ford exchangeable bond actually came close to mid-point between senior unsecured Ford levels and Ford ABS levels - which could account for part of Ford's ability to price inside of recent triple-B autos.
Ford's last ABS trade was done in February - Ford - F 2011-1. The triple-B piece (4.21yr a/l) within that trade priced at mid-swaps+140bp (which today would be around T+160bp on a fixed-rate basis). So mid-point between a Treasuries plus 235bp level on a theoretical new Ford 5yr senior unsecured and the Treasuries plus 160bp on Ford's triple-B tranche in its most recent ABS trade is around T+197.5bp.