Ford Downgrade Stirs Questions About S&P Methods

NEW YORK, Nov 12, 2003; Dena Aubin writing for Reuters reported that a market-jolting rating decision on Ford Motor Co. on Wednesday is stirring fresh questions about the role of the rating agencies and their influence over the $5 trillion U.S. corporate bond market.

Spreads on Fords bonds rallied sharply after rating agency Standard & Poor's downgraded Ford's debt but assigned it a stable outlook, signaling that Ford will likely stay out of junk territory for at least two years.

Yet yield spreads on Ford's bonds are still about 0.20 percentage wider than before S&P put Ford on review for a downgrade last month.

S&P's may have contributed to volatility in Ford's bonds because it sent mixed signals on how it views Ford, analysts said.

"This is a good example of why investors and Wall Street are so critical of the rating agencies," said William Cunningham, head of credit strategy at FTN Financial. "S&P effectively introduced a substantial amount of volatility where investors and Wall Street players made and lost millions of dollars." FTN Financial does not own Ford bonds or have a banking relationship with the company.

S&P analyst Scott Sprinzen said the agency has been forthcoming about its view on Ford.

"We feel that we gave ample indications of our thinking about the rating," Sprinzen said. "Some investors did not pay attention to the subtleties of what we've been writing and saying all year, but I don't think they have us to blame for that."

SEA CHANGE AT S&P?

With $180 billion of debt, Ford and its finance arm are the biggest U.S. corporate borrowers and often set the tone for the broader corporate bond market.

Some investors have complained that the agencies have become too aggressive since Enron declared bankruptcy in late 2001, prompting hearings on the rating agencies by the U.S. Securities and Exchange Commission (News - Websites) . Enron was rated investment grade just days before its bankruptcy filing.

S&P drew barbs from analysts last month when it surprised the market by putting Ford's "BBB" rating on review for a downgrade. The action came despite progress the automaker was making on breaking even on its automotive operations, one metric S&P had outlined as necessary to maintaining Ford's ratings.

Many investors assumed a downgrade was inevitable and were more worried that S&P would assign a negative outlook. That could have sparked selling in Ford bonds because of the potential for another downgrade to junk.

While downgrading Ford on Wednesday to "BBB-minus," S&P took the unusual step of saying another downgrade is unlikely as long as Ford maintains healthy liquidity and "funding flexibility."

"It's almost a sea change in the way that S&P has rated this credit," said Brian Beargie, an auto analyst at Banc One Capital Markets. "That's incredibly positive for investors because we're getting the sense that the ratings have found somewhat of a floor."

MOODY'S, S&P VIEWS DIVERGE

Still, the market would like more clarity on S&P's rating methods, said Beargie. "We have not received specific metrics on which they are going to judge the Ford rating," he said.

S&P's "BBB-minus" rating on Ford is now 2 notches below the "Baa1" rating assigned by Moody's Investors Service (News - Websites) .

"There's obviously a discrepancy between the two rating agencies about the credit-worthiness of the name," said Christopher Mahony, portfolio manager for J&W Seligman.

Although the market cheered the stable outlook, it appears contradictory on S&P's part, said FTN Financial's Cunningham.

"This is an industry that generally is either improving or declining, but it is almost never stable," he said.

After coming under fire for putting Ford under review, S&P was "throwing a bone to Ford," said one credit default swaps trader.