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Old 09-10-2003, 07:35   #1 (permalink)
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U.S.A.:Ford and GM bond returns may outpace other corporate debt

Autos Insider
By Terence Flanagan / Bloomberg News

NEW YORK -- Bonds of General Motors Corp. and Ford Motor Co., the world's biggest automakers, may offer some of the best returns among U.S. corporate debt after an 11-month rally has dimmed the prospect of further gains in most other debt, some investors said.

Notes of Ford, General Motors and carmakers such as DaimlerChrysler AG yield about 2.4 percentage points more than Treasuries on average, compared with 1.09 percentage points for investment-grade corporate bonds overall, according to Lehman Brothers Holdings Inc. The so-called spread is the widest of any industry making up more than 1 percent of U.S. company bonds.

Some telecommunications, utility and media bonds offered higher yields earlier this year, though spreads for those industries have since converged to near the market average, said Louise Purtle, an analyst at bond research firm CreditSights Inc. in New York. Ford's 7.25 percent notes due in 2011, sold through Ford Motor Credit Co., yield about 6.97 percent, compared with 6.15 percent for similar AT&T Corp. debt.

"Autos do stand out," said Purtle, who recommends investors hold an equal percentage of carmaker bonds as are in benchmark indexes.

Ford and General Motors are two of the biggest corporate debtors and auto bonds overall make up 6.4 percent of the benchmark Lehman Credit Index. Bond managers trying to exceed the returns of indexes against which they measure performance may hold more or fewer of some bonds than the percentage in the indexes.

Yield Enticement
Challenges for U.S. automakers include declining profit margins on light trucks and sport utility vehicles, deficits in employee pension and health-care plans, and contract talks with union workers, said Robert Auwaerter, who helps manage $225 billion of bonds at Vanguard Group Inc.

Still, auto bonds offer attractive yields at current levels, with the prospect of price gains on improvement in the industry, said Auwaerter, who declined to specify what auto bonds he holds.

Auto bonds have returned 6.6 percent this year on average, including price changes and interest payments, compared with a 4.5 percent return for investment-grade bonds overall, according to Merrill Lynch & Co. data.

Yield spreads on auto bonds narrowed to about 2.27 percentage points, or 227 basis points, last week, their lowest since July 2002, according to Merrill. The yields then swelled about 10 basis points on average after Detroit-based General Motors on Friday filed to sell as much as $30 billion in stock and debt.

"Auto bonds trade with more volatility than many other sectors," CreditSights' Purtle said.

More Risk?
Yields on telecommunications bonds have narrowed to 126 basis points more than government debt on average from 232 basis points at the beginning of the year, according to Lehman, while utility spreads have narrowed to 124 basis points from 234 basis points. Auto spreads remain wide, indicating investors perceive more risk to the debt, as vehicle makers struggle with competition and too much production.

Carmakers' bonds may see a "modest" narrowing of yield spreads should economic growth accelerate, said Sasha Kamper, an analyst at Des Moines, Iowa-based Principal Global Investors, which manages more than $60 billion of bonds. "The most important thing for the industry is stabilization of prices and improvement in profit margins and cash flow," she said.

Principal owns more auto bonds than the percentage in benchmark indexes, though it has reduced its holdings. The firm prefers General Motors bonds to Dearborn, Michigan-based Ford's, Kamper said.

"The sector is a lot less attractive than it was two months ago" because yield spreads have narrowed, she said.

Maturing Debt
General Motors, Ford and Stuttgart, Germany-based DaimlerChrysler have a combined $283.5 billion of notes and bonds outstanding, with about $70 billion of that maturing this year and next, according to Bloomberg data.

Both Moody's Investors Service and Standard & Poor's have a negative outlook on Ford and General Motors debt, indicating a rating cut is more likely than an increase. Moody's has DaimlerChrsyler's bonds under review for a possible rating cut, and S&P has a negative outlook on the debt.

DaimlerChrysler Chief Executive Juergen Schrempp said yesterday at a car show in Frankfurt that the world's car markets aren't growing and the industry has overcapacity. General Motors, the world's largest automaker, doesn't expect incentives such as discounts and free equipment to end anytime soon, Chief Executive Rick Wagoner said at the same show.

"That's why I am underweight" auto bonds, said Mark McDonnell, who helps manage $1.25 billion of bonds at SEB Asset Management in Stamford, Connecticut. "At the end of the day Ford and General Motors will be wider" in yield over Treasuries compared with current levels, he said.

'Attractive'
Daniel Genter, who helps oversee $1.1 billion as president of RNC Genter Capital Management in Los Angeles, holds more auto debt than is in benchmark indexes. He favors debt of the automakers' finance units such as Ford Motor Credit, which make money by financing vehicles and as such depend more on vehicle sales and less on profit per vehicle sold.

"Unit sales continue to be strong," Genter said. Yields on auto finance bonds are "attractive" and reflect a perception of risk that "isn't warranted," he said.
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