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Ford: Showdown With S&P;
November 10, 2003

The struggle between advocates of fortune telling and the iconoclasts who believe in financial analysis is visible in the hot credit debate regarding Ford Motor Co. (NYSE:F). On the one hand, S&P; is threatening to downgrade the number two automaker to a notch above junk debt this week � and event that could give the bond market a serious case of indigestion.

On the other hand, most of the analyst community and investors in this huge issuer�s paper argue that concerns about the company�s finances are overblown. Banc One Capital Markets even upgraded the bonds of F to a �buy� from a �sell� based on the notion that the bad news is already out there in the market and is reflected in F�s bond yields.

F is the largest issuer in the corporate bond market and the company has a big following among fund managers who like the 300 basis point spread over Treasuries. They point to the $12 stock price as evidence that F�s fortunes are on the mend. This is more proof that Wall Street really does believe in efficient market theory as a basis for measuring financial risk.

If the Bulls are right, then a rising economy could lift the Blue Oval�s fortunes, but we�d still like to see the company make money producing cars rather than from financing before we join the amen chorus. We think S&P; is right: F won�t be out of the woods until it generates sustained profits from auto production. The Street loves the 300 plus spread on F�s paper whether S&P; downgrades the name or not. But consider that if the price of money were not so low, the yield spread on bonds issued by F and other automakers would be a lot wider.

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