As part of Ford Motor Co.’s drive to regain an investment-grade credit rating, Ford Motor Credit created a new type of security. The Ford Upgrade Exchange Linked (FUEL) notes bridge the gaps between asset-backed and unsecured debt and between the non-investment grade and investment-grade markets. The notes were designed to smooth the way for a rating upgrade and also served to reintroduce Ford to investment-grade investors.
The FUEL notes were issued as asset-backed securities (ABS) secured by consumer car loans. But if Ford is upgraded to investment-grade by two of the three major credit rating agencies, the securities would be exchanged for unsecured Ford Credit notes and the asset-backed structure would be terminated, releasing the loans that served as collateral. That would reduce the portion of Ford Credit’s assets used as ABS collateral—its asset encumbrance ratio—which is a key factor for rating agencies, thus bolstering its chances for an upgrade.
“One of the issues the agencies have highlighted is a high level of asset encumbrance, and that’s largely been driven by the fact that we’ve used securitization as a means to cost-effectively fund our business over the last three or four years,” says Dave Webb, director of financial strategy for Ford Credit. “As we were thinking about transitioning our company to a more investment-grade capital structure, one of the things that would need to be addressed was that asset encumbrance ratio.”
Because the FUEL notes start out as asset-backed securities, they carry a higher credit rating and cost the company less than un-secured issuance would.
Designing the notes took about eight months and required a huge cross-functional effort, including considerable accounting and legal help. “We were creating a security that had never been done before, and has both structured characteristics and unstructured characteristics,” Webb says.
The FUEL notes were built to appeal to investment-grade investors, in part by making them resemble corporate bonds rather than ABS. For example, instead of paying down as the underlying loans are paid off, like ABS, the FUEL notes are secured by a revolving facility to which new loans are added as others are paid down. FUEL notes also pay interest semi-annually, while asset-backeds pay interest once a month.
The notes proved successful. In April, the initial offering of $1.5 billion five-year notes elicited $5.6 billion of demand and was priced about 50 basis points lower than a comparable unsecured Ford Credit issue. The second offering of $1 billion of five-years in June came in a more difficult market environment, but priced about 100 basis points lower than a comparable unsecured issue. The company estimates that it saved $100 million on the two issues.
The FUEL notes help Ford “continue to spur our trajectory and movement toward investment-grade,” Webb says. “We also knew that if that’s our ultimate destination, we needed to do some work in terms of reintroducing ourselves to some of the investment-grade investors that we hadn’t talked to in a while. This was a great opportunity to reintroduce ourselves to those folks.”
Ford Credit executives embarked on a weeklong road show to introduce FUEL notes to the investment community, meeting with 50 or 60 different institutional investors, Webb says. “For a number of the meetings, there were 10, 12, 15 people in the room,” he says. “We had the asset-backed people, the unsecured people, the portfolio managers, the traders.”
When the FUEL notes came to market, investment-grade investors grabbed more than 80% of the first deal and more than 90% of the second issue.