Ford Motor Co's debt investors are betting the company will be able to turn around its business despite posting a record loss for 2006, and the automaker's bonds may still have room to improve. Ford on Thursday posted a fourth-quarter net loss of almost $5.8 billion on declining truck sales and charges for employee buyouts.
The company also said it would cut production this quarter and lose market share through September. The cost to insure the automaker's debt with credit default swaps fell by 16 basis points to 453 basis points, or $453,000 per year for five years to insure $10 million in debt. The swap has tightened 77 basis points in the past month, according to data provider Markit.
One factor behind the tightening has been bullishness for high yield bonds in general, which have rallied 32 basis points this year, to 2.57 percentage points over Treasuries, according to Merrill Lynch.
"There has been a very strong bid for almost any high yield credit as an absence of bad or unexpected news continues to allow spreads to tighten," said Mark Altherr, fixed income analyst at Credit Suisse in New York.
"GM has vastly improved, despite their continuing accounting problems," Altherr added. "If GM's momentum continues, that tightening will also cause Ford to tighten on the expectation that if GM can do it, Ford can do it."
General Motors Corp, which is in the middle of a restructuring that includes slashing more than 34,000 jobs and closing 12 plants, has said it expects to be profitable in the fourth quarter.
GM's default swaps have rallied to 319 basis points, compared with around 700 basis points last July. "It's not about Ford's quarterly earnings anymore, it's whether or not you believe Chief Executive Alan Mulally can turn it around before they run out of cash," said Brad Rubin, a senior auto sector trading specialist at BNP Paribas in New York.
"It seems that most people on the street think that is the case, so if that is the case, then further tightening should ensue," he said. "There is certainly time to get short again on Ford, but it's not today," Ford is in the early stages of a turnaround plan dubbed "Way Forward" that includes closing 16 plants and cutting up to 45,000 jobs in North America.
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