What’s so secure about it?

Ford and General Motors, two of the world's biggest bond issuers, with $162 billion and $187 billion outstanding in consolidated debt respectively, saw spreads on their outstanding unsecured debt gap out to the widest ever level last month. In the second week of October, Ford's dollar bond spreads moved out by 170 basis points. A high triple-B issuer, it was being quoted by traders in dollars and cents, implying it was already viewed as junk.

The unsecured debt markets have been closed to Ford's financing arm, Ford Credit, for most of the year. But the issuer reasons that all is not lost. It has just been on an extensive investor roadshow trying to comfort bondholders about its diversity of funding, ability to refinance maturing debt and, most significantly, how much it can rely on asset-backed funding. "Securitization has allowed us to mitigate the impact of Ford downgrades and spreads," Bibiana Boerio, executive vice-president and CFO of Ford Credit said during the London leg of its roadshow. "But we won't go to 100% securitization - we don't want to be locked in to any particular funds."

The market had been anticipating a downgrade for some weeks. But now not only was Ford facing a further credit ratings cut, which could prevent its unsecured bond spreads pulling in to anything like reasonable levels for new issuance, it was being slapped on the wrist for trying to do something about it.

"Given the size of their asset base, it can't be a good thing for them to be so reliant on a single funding channel, but this is something we will be discussing with them over the coming weeks," said Standard & Poor's credit analyst Scott Sprinzen on the day of the rating action. He added that the heavy reliance on ABS "may have already had an adverse impact on its rating" and that Ford faced "a greater chance of a downgrade then an affirmation".

The fact that he called the trading levels of Ford's unsecured debt "exaggerated" and "inexplicable" hardly offered much consolation to the company when he said that this could also influence a downgrade, given that the market's reaction was responsible for Ford Credit's reliance on ABS funding.

General Motors and GMAC probably faced an even greater shock when they found they had been downgraded to triple-B from triple-B+ with a stable outlook, largely on the back of the huge increase in the parent company's unfunded pension liability - to a projected $23 billion by the end of this year.

The agency said that the same potential for over-reliance on the securitization market could also affect GMAC.

Despite Ford Credit and GMAC's success in diversifying their funding over the past few years, given the size of their funding needs they seem to be caught in the same intractable situation as more and more markets close to them.

They had to move most of their funding out of commercial paper in 2000 and 2001 into term debt. Now that those markets are shut to them and they are securitizing more and more of their receivables, they are punished for that too.

Liquidity, leverage and all-in cost of funds at both companies have actually improved, yet while they and their unprofitable automotive parents are under fire from the ratings agencies, their continued access to long-term funding looks to be under threat.

What on earth do these colossal financing vehicles do next?

The first answer, for Ford Credit, is to convince Standard & Poor's that the ABS markets are not the single funding channel it supposes them to be. "We think that we will be successful in demonstrating to S&P that there are many forms of securitization market and while some may come and go there is a wide range of flexibility," Boerio told Euromoney a few days after the S&P conference call.

Indeed, Ford Credit does have a range of products at its disposal - its own term ABS issues, its own asset-backed CP conduits, FCAR and Motown notes, and third-party asset-backed CP conduits.

The agency wasn't worried about unsecured bondholders being subordinated, given that finance company assets are of a uniformly higher quality than in an industrial company, even if Ford ramped securitized assets up from 25% to 35%. The key was how strong and deep the market is. "S&P said that they had some work to do to get them up to speed on the depth of the asset-backed market," said Boerio. "So, together with a couple of other issuers from the investment banks, we are getting a wealth of material together on the asset-backed market and how it's performed over its long history. We've got a wide range of opinions from investment banks that say this is a very deep market."

Opinions vary, though, about exactly how deep that market is. According to CreditSights estimates, outstandings in the US ABS markets, including asset-backed CP, are over $1 trillion. That suggests that Ford Credit would not have much difficulty even if it had to do all of next year's projected $22 billion to $32 billion of term funding in that market.

But more and more issuers are chasing the same investors. Paul Schmidt, corporate controller of General Motors, says that GMAC will also do about a third more ABS funding of its $30 billion US funding planned for next year. Add that to DaimlerChrysler's ABS needs and this could be enough to overwhelm US investors with exposure to individual names or even to US auto ABS as an asset class. Volumes have only been $65 billion this year.