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ordand Ford Motor Credit Co. (FMCC), its finance unit, were frequent visitors to the corporate
debt markets in 2001, selling over $22 billion in long-term notes and bonds. Despite the prob-
lems in the auto industry, investors nervous about stock market volatility were willing to accept
the credit risk to get higher yields. The company’s 2001 offerings had something for all types of
investors, ranging from 2- to 10-year notes to 30-year bonds. Demand for Ford’s debt was so high
that in January the company increased the size of its issue from $5 billion to $7.8 billion, and Octo-
ber’s plan to issue $3 billion turned into a $9.4 billion offering.
The world’s second largest auto manufacturer joined other corporate bond issuers to take
advantage of strengthening bond markets. Even though the Federal Reserve began cutting short-
term rates, interest rates for the longer maturities remained attractively low for corporations.
Unlike some other auto companies who limited the size of their debt offerings, FMCC decided to
borrow as much as possible to lock in the very wide spread between its lower borrowing costs
and what its auto loans yielded.
All this debt came at a price, however. Both major bond-rating agencies—Moody’s
Investors Service and Standard & Poor’s (S&P)—downgraded Ford’s debt quality ratings in
October 2001. Moody’s lowered Ford’s long-term debt rating by one rating class but did not
change FMCC’s quality rating. Ford spokesman Todd Nissen was pleased that Moody’s confirmed
the FMCC ratings. “It will help us keep our costs of borrowing down, which benefits Ford Credit
and ultimately Ford Motor,” he said. S&P’s outlook for Ford was more negative; the agency cut
ratings on all Ford and FMCC debt one rating class. The lower ratings contributed to the higher
yields on Ford’s October debt. For example, in April FMCC’s 10-year notes yielded 7.1 percent,
about 2 points above U.S. Treasury bonds. In October, 10-year FMCC notes yielded 7.3 percent, or
2.7 points above U.S. Treasury bonds.
For corporations like Ford, deciding when to issue debt and selecting the best maturities
requires knowledge of interest rate fundamentals, risk premiums, issuance costs, ratings, and
similar features of corporate bonds. In this chapter you’ll learn about these important topics and
also become acquainted with techniques for valuing bonds.FORD
FORDCRUISES
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