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."

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