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What’s so secure about it?

Large investment-grade corporate borrowers have increasingly turned to securitization as rating downgrades and investor risk aversion have pushed spreads on normal bonds to junk levels. Can asset-backed markets meet these giant issuers’ funding needs?

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 danger of over-reliance on ABS
During a conference call for bond investors three weeks later, after the launch of Ford's third-quarter results - which were actually marginally better than expected - Malcolm Macdonald, vice-president, finance and treasurer of Ford Motor pointed out that if it had to, Ford Credit could rely on securitization altogether for next year's funding by securitizing up to 35% of managed receivables.

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