Uncertainties regarding the likelihood of federal support for the ailing auto manufacturers, continued stress in the credit markets due to the subprime mortgage mess and the depressed state of the world economy have combined to put severe downward pressure on the auto lending industry.
Stocks of the automobile companies have been among the worst performers on the New York Stock Exchange for the last 2 years, and the bonds of these companies have fared equally as poorly, with one notable exception:
Ford Motor Credit Company LLC (FCJ) bonds have been holding their value at attractive, but reasonable, yields.
While bonds of competitor General Motors Acceptance Corporation (GMAC) are trading at yields approaching 50%, Ford Motor Credit bonds trade at prices yielding around 9.5% for maturities of 9 years.
Why this division in returns?
While GMAC is affected by the generally more risky state of affairs at General Motors (GM) as compared to Ford Motors (F), the primary issue affecting the value of these bonds is the condition of RES Corp., the mortgage lending subsidiary of GMAC, which has serious exposure to the subprime mortgage lending crisis.
GMAC also had been very aggressive in the subprime auto loan sector. Investors have soured on GMAC bonds at the same rate at which General Motors stock has been avoided by equity investors.
Ford Motor Credit, on the other hand, has historically been more cautious with subprime auto lending and does not have the exposure to the subprime home mortgage problem and the mortgage foreclosure exposure of GMAC. Ford withdrew from the subprime auto loan business in 2001 and cautiously re-entered the business in 2004.
In doing so, Ford moved carefully with state-of-the-art technology and a disciplined approach to this area of lending. The avoidance of the subprime mortgage and foreclosure problems which have plagued GMAC has served the investor in Ford Motor Credit bonds well.
Recent trades in FCJ bonds maturing in 2017 with a coupon of 6.875% have been made at a price of 84.75, producing a yield to maturity of 9.5% and a current yield of 8.11%. Shorter maturity bonds due in July of 2011 with a coupon of 7.75% have traded at slightly over par to yield 7.7% at maturity.
The purchase of these intermediate term bonds is a very attractive opportunity for those investors looking to put their cash to work to gain a decent rate of return.
For those investors not ready to commit to the equity markets and looking for a relatively low-risk option, corporate bonds provide that choice. Ford Motor Credit bonds are among the more attractive bonds in this sector, especially in the 5- to 10-year maturity range.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com.
