Ford Credit debt sale price hints at economic optimism

NEW YORK, July 30 (Reuters) - The finance arm of Ford, the second-biggest U.S. carmaker, sold debt on Thursday for a price that hinted investors are becoming less dismal about the auto sector and slightly optimistic about the broader economy, analysts said.

Ford Motor Credit Co LLC, whose parent is Ford Motor Co (F.N), sold $1.75 billion of three-year notes at a yield of 10.875 percent, much lower than the 13.0 percent it had to pay investors two months ago in a five-year note sale, the closest comparable recent sale of this type.

U.S. carmakers are struggling to survive the roughest recession in decades, but signs have recently emerged that the U.S. consumer is coming back to life. Ford is the No. 2 U.S. automaker by sales and market share. The company is also the only Detroit automaker to steer clear of a federally funded reorganization in bankruptcy.

Ford Motor Credit last week reported reported stronger second-quarter results, with pre-tax earnings rising to $646 million from a year-earlier loss of $2.4 billion. Standard & Poor's said on Monday there was now potential for an upgrade to both Ford and its finance arm because of signs of progress in stabilizing market share and reducing cash burn.

Buying Ford Credit's debt now "is definitely a recovery story," said William Larkin, portfolio manager with Cabot Money Management in Boston.

"If you think the economy is going to recover, this is a way to lock in equity-like returns," at a time when investors, still smarting from huge losses in 2008, are still nervous about the stock market, Larkin said.

The three-year notes' yield of 10.875 percent was attractive, though still reflecting that serious threats to automakers remain, Larkin said.

"The deal's timing takes advantage of the currently receptive market environment," wrote Thomas Ferguson, an analyst at KDP Investment Advisors, Inc. in a research note on Thursday.

However, KDP's default risk ranking of Ford Motor Credit "reflects both the significant risks associated with the automobile and financing industries, offset by our view that fundamental operating conditions are stabilizing," Ferguson wrote. KDP recommended buying the new Ford Motor Credit notes, he added.

The three-year notes, due Aug. 1, 2012 and bearing a coupon of 7.5 percent, were sold on Thursday at a price of 91.589 cents on the dollar, almost 10 cents on the dollar more than the steep discount the company had been forced to offer investors at its five-year note sale in late May.

Soon after the issue priced, the notes traded up at about 92 cents on the dollar, said one corporate bond trader who declined to be named.

"I would put Ford in general as a high risk, just because of the amount of debt they have, their business model, and the low credit rating. They will be issuing more debt in the future at higher yields," Larkin added.

The three-year note issue is rated Caa1 by Moody's Investors Service, CCC-plus by Standard & Poor's and B-minus by Fitch, credit rating agencies; which classify those lower rungs of speculative grade or junk bonds as carrying substantial risk. (Reporting by John Parry and Dena Aubin; Additional reporting by Kevin Krolicki in Detroit)