Unformatted text preview: 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 October’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 shortterm 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. F 263 264 PART 2 Important Financial Concepts LG1 6.1 Interest Rates and Required Returns
As noted in Chapter 1, financial institutions and markets create the mechanism
through which funds flow between savers...
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