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During the summer of 1999 the future course of interest rates was highly uncertain.
Continued strength in the economy and growing fears of inflation had led to interest
rate increases, and many analysts were concerned that this trend would continue.
However, others were forecasting declining rates—they saw no threat from inflation,
and they were more concerned about the economy running out of gas. Because of
this uncertainty, bond investors tended to wait on the sidelines for some definitive
economic news. At the same time, companies were postponing bond issues out of
fear that nervous investors would be unwilling to purchase them.
One example of all this was Ford Motor, which in June 1999 decided to put a
large bond issue on hold. However, after just three weeks, Ford sensed a shift in the
investment climate, and it announced plans to sell $8.6 billion of new bonds. As
shown in the following table, the Ford issue set a record, surpassing an $8 billion
AT&T issue that had taken place a few months earlier.
Ford’s $8.6 billion issue actually consisted of four separate bonds. Ford Credit,
a subsidiary that provides customer financing, borrowed $1.0 billion dollars at a
2-year floating rate and another $1.8 billion at a 3-year floating rate. Ford Motor itself
borrowed $4 billion as 5-year fixed-rate debt and another $1.8 billion at a 32-year
fixed rate.
Most analysts agreed that these bonds had limited default risk. Ford held $24
billion in cash, and it had earned a record $2.5 billion during the second quarter of
- However, the auto industry faces some inherent risks. When all the risk factors
were balanced, the issues all received a single-A rating. Much to the relief of the jittery
bond market, the Ford issue was well received. Dave Cosper, Ford Credit’s Treasurer,
said “There was a lot of excitement, and demand exceeded our expectations.”
The response to the Ford offering revealed that investors had a strong appetite
for large bond issues with strong credit ratings. Larger issues are more liquid than
smaller ones, and liquidity is particularly important to bond investors when the direc-
tion of the overall market is highly uncertain.
Anticipating even more demand, Ford is planning to regularly issue large blocks
of debt in the global market. Seeing Ford’s success, less than one month later Wal-
Mart entered the list of top ten U.S. corporate bond financings with a new $5 billion
issue. Other large companies have subsequently followed suit.
Source:From Gregory Zuckerman, “Ford’s Record Issue May Drive Imitators,” The Wall Street Journal,July 12,
1999, C1. Copyright © 1999 Dow Jones & Co., Inc. Reprinted by permission of Dow Jones & Co., Inc. via Copy-
right Clearance Center.
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