(Bloomberg Opinion) — Earlier this week, BlackRock Inc. suggested that traders follow the Federal Reserve as they make investment decisions. The world’s largest money manager will be “purchasing what they’re purchasing, and assets that rhyme with those,” said Rick Rieder, head of BlackRock’s global allocation team.
Set aside for now that BlackRock will literally be doing that as investment manager for the Fed’s two credit-market facilities. That mantra has caught on across Wall Street: Investors poured a record $7.66 billion into U.S. junk-bond funds in the week through April 15, the first period since the central bank announced that it would also purchase corporate bonds from “fallen angels” and even some high-yield exchange-traded funds.
Leave it to the biggest fallen angel of this downgrade cycle, Ford Motor Co., to remind investors that this simple strategy is not without risk.
Ford, fresh off announcing a $2 billion first-quarter loss, is seeking to raise money by selling unsecured bonds due in three, five and 10 years. The longest maturity is being marketed at a yield of about 10%, higher than the going rate of about 9% for its outstanding debt that matures in July 2031. That yield already came down from 11% initially and will likely fall again by the time the deal is finalized — look no further than Carnival Corp.’s offering two weeks ago for precedent. Either way, it’s going to be more than twice as much as Ford paid to borrow at its last sale of similar securities in December 2016. Its shorter-term debt has yields more in line with single-B rated bonds than double-B.
Obviously, if you believe Ford will always make full and timely interest payments and intend to hold the securities until maturity, a higher yield is a feature, not a defect. If you’re just looking for a quick profit from following the Fed, though, Ford might make you rethink that strategy. If the biggest beneficiary of the central bank’s lifeline to fallen angels struggles to get favorable borrowing costs, maybe bond investors care about the fundamentals after all.
That preliminary $2 billion loss for the first quarter reflects just one month in which the coronavirus really began to take an economic toll in the U.S. and Europe. Ford’s indication that it had about $30 billion of cash as of April 9 signaled it had burned through about $8 billion since the start of the year, a figure that’s only likely to grow, Bloomberg Intelligence analyst Joel Levington wrote earlier this week.
Levington pointed out that credit-rating firms historically haven’t stopped at one notch when lowering Ford. That’s troubling in its own right for creditors, but it’s especially foreboding for those counting on the Fed’s backstop to buoy Ford’s bonds. As the central bank’s criteria currently stands, its facilities can’t buy debt from post-March 22 fallen angels if the ratings slip below the double-B tier.
For now, history appears to be repeating itself for automakers. Earlier this month, a Ford executive called for some form of government stimulus for the industry, with one option being a revival of the 2009 “Cash for Clunkers” program that encouraged drivers to turn in older models in exchange for thousands of dollars that could be put toward a new purchase. Nothing is finalized, though, and it’s unclear if the program would work as well at a time when people are encouraged to stay home.
Those social-distance mandates led Ford to join with other automakers including General Motors Co. and Fiat Chrysler Automobiles NV in shutting down work on cars at its North American facilities to help contain the spread of the virus. It hasn’t put a timetable on when the factories will reopen amid a patchwork of stay-at-home orders from the states that threaten to disrupt its supply chain. There’s probably not much of a rush. About 22 million Americans have filed for unemployment benefits in just one month, raising doubts about how many buyers there will be for Ford’s cars even when it can start producing them again.
It’s also not as if things were going swimmingly for Ford before the coronavirus struck. The company botched the rollout out of a redesigned Explorer SUV and has little to show so far for an $11 billion restructuring program announced in 2018.
Granted, shares of Ford and AMC Entertainment Holdings Inc., which was also seeking to borrow on Friday, increased as investors took solace in the fact that the companies could raise cash immediately. But optimism over treading water can only go so far. For all the money going into high-yield funds, the asset class hasn’t rocketed higher in tandem. In fact, the largest junk-bond ETF, BlackRock’s $17.8 billion iShares iBoxx High Yield Corporate Bond ETF (ticker: HYG), has declined from where it ended on April 9, the day the central bank announced it might purchase such funds.
More speculative-grade companies are borrowing, which is a sign of market stability and staves off a worst-case scenario of a liquidity squeeze forcing widespread defaults. Still, many of those particularly devastated by the coronavirus have a difficult path forward, Ford among them. Double-digit yields are a reminder that any sort of outlook about the fate of corporate America remains very much a guessing game, regardless of what the Fed is buying.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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