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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Ford’s Bonds Date: 10/21/2011 3:16 PM
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By now you should have seen the wire release that S&P has upgraded Ford’s debt. http://finance.yahoo.com/news/SP-upgrades-Ford-2-notches-apf... Predictably, as the linked article notes, the stock price has jumped, and more so than the broad market, as a 5-day chart shows. http://finance.yahoo.com/echarts?s=F+Interactive#chart5:symb... However, if you look at a 30-day chart of daily prices, you’ll see the stock price began to diverge from the broad market several weeks ago, as insiders began to trade on the still-not-public information that S&P would be upgrading Ford. http://finance.yahoo.com/echarts?s=F+Interactive#chart6:symb...

That’s the reality, folks. By the time the investing public is told the fundamental news, traders have already made their moves based on technical data immediately available to them from price and volume. But this question could be asked. “Is there still an opportunity with their bonds?" Running a scan for all of Ford’s debt will return the following list:
 
Cpn Due YTM Mdy SP Issuer
3.039 01/13/12 1.28% Ba2 BB+ Ford Motor Credit Co Llc
7.800 06/01/12 1.89% Ba2 BB+ Ford Motor Credit Co Llc
7.500 08/01/12 1.95% Ba2 BB+ Ford Mtr Cr Co
7.000 10/01/13 2.85% Ba2 BB+ Ford Motor Credit Co
8.000 06/01/14 3.82% Ba2 BB+ Ford Motor Credit
8.700 10/01/14 3.94% Ba2 BB+ Ford Mtr Credit Co
7.000 04/15/15 4.11% Ba2 BB+ Ford Motor Credit Co Llc
12.000 05/15/15 3.80% Ba2 BB+ Ford Motor Credit Co Llc
5.625 09/15/15 3.81% Ba2 BB+ Ford Motor Credit Co Llc
5.000 05/15/18 4.74% Ba2 BB+ Ford Motor Credit Co. Llc
8.125 01/15/20 4.98% Ba2 BB+ Ford Motor Credit Co Llc
9.375 03/01/20 6.05% Ba3 BB+ Ford Holdings Inc
5.750 02/01/21 4.93% Ba2 BB+ Ford Motor Credit Co Llc
5.750 06/20/21 5.71% Ba2 BB+ Ford Motor Credit Company
5.875 08/02/21 5.13% Ba2 BB+ Ford Motor Credit Co Llc
9.215 09/15/21 6.45% Ba3 BB+ Ford Mtr Co Del
8.875 01/15/22 6.05% Ba3 BB+ Ford Mtr Co Del
7.125 11/15/25 6.42% Ba3 BB+ Ford Mtr Co Del
6.625 02/15/28 6.20% Ba3 BB+ Ford Mtr Co Del
6.625 10/01/28 6.29% Ba3 BB+ Ford Mtr Co Del
6.375 02/01/29 6.33% Ba3 BB+ Ford Mtr Co Del
9.300 03/01/30 6.88% Ba3 BB+ Ford Holdings Inc
7.450 07/16/31 5.89% Ba3 BB+ Ford Mtr Co Del
8.900 01/15/32 6.84% Ba3 BB+ Ford Mtr Co Del
7.750 06/15/43 7.31% Ba3 BB+ Ford Mtr Co Del
7.400 11/01/46 7.17% Ba3 BB+ Ford Mtr Co Del
7.700 05/15/97 7.64% Ba3 BB+ Ford Mtr Co Del

For now, let’s ignore the minor problem that Moodys notches the debt differently than S& P and differently according to whom the issuer is. My thinking is this. If Ford Motor is in trouble, then their credit arm is, too. Both companies are going to survive, or both of them aren’t, and trying to distinguish between the two is an exercise worth undertaking only if you intend to make a massive bet on one or the other. But for the purposes of buying a couple of bonds (or five, or ten, or twenty), it’s just not going to make a lot of difference. “In for a penny, in for a pound.”

Now, cast your eye over that list and try to identify the “sweet spot(s)” on the yield-curve. The two obvious candidates are the 9.375’s of ’20 and the 9.215’s of ’21, right? So, let’s go shopping. The min-purchase for the 9-3/8’s is five bonds (with no book for a backdoor entry), and the min for a 9.215’s is a single. So, if your intention is to nibble, then your choice is made for you. You can’t afford the 9.375’s. So the question becomes, do you want to afford the 9.215’s and its price of 120? There’s at least four ways to answer that question. (But which make sense, and which don’t, I’ll leave to you to sort out).

(1) “I never buy bonds selling at a premium, because, by and large, it keeps me out of trouble.”
(2) “I look for bonds selling at a premium, because they are often underpriced relative to the yield they offer.”
(3) “A price above par is merely a reflection that interest rates have dropped since the bond was issued, and the premium can be ignored.”
(4) “I never buy at a premium to par, because I don’t like to suffer capital losses.”

My take on the “premium-to-par” debate is this. There’s two ways to make money from bonds: cap-gains and the coupon. If I buy at a discount to par, I’ll make cap-gains. If I buy a fat coupon, I’ll make fat income. But what happens when the price of that fat coupon puts the price of the bond above par? If the gains from the coupon more than offset the losses due to the purchase-price, then all is well and good. So let’s do some math. To buy the 9.215’s of ’21 is to spend 120 of today’s dollars to receive 100 future dollars in principal (plus the income-stream, of course.) Apart from the fact that buying this bond at premium of 20 points will result in an unavoidable, 20% haircut, it’s also a reasonable bet that future dollars will have less purchasing-power than present-day dollars. That will exacerbate true capital losses even further. But how bad, really, will those losses be? To avoid them without running the numbers is stupidity itself, and that’s why I think the debate over “never buy at premium” is so pointless. It’s net-profits that matter, not just losses on one portion of the investment without regard to gains achieved elsewhere.

There’s lot of ways to discount for inflation, and there’s lot of inflation rates one could work with. But a forward-rate of 5% is a good-enough guess, and my (proprietary) method is discounting is as good as any. So here’s what the adjusted yields to maturity for all of Ford’s Fords would be for single bonds bought through E*Trade, at prices prevailing as I write this:

Cpn Due Price Adj_YTM Issuer
3.039 01/13/12 100.475 -8.1% Ford Motor Credit Co
7.800 06/01/12 103.600 -4.5% Ford Motor Credit Co
7.500 08/01/12 104.300 -4.1% Ford Mtr Cr Co
7.000 10/01/13 107.840 -2.5% Ford Motor Credit Co
8.000 06/01/14 110.350 -1.4% Ford Motor Credit
8.700 10/01/14 113.150 -1.2% Ford Mtr Credit Co
7.000 04/15/15 109.350 -1.0% Ford Motor Credit Co
12.000 05/15/15 127.100 -1.3% Ford Motor Credit Co
5.625 09/15/15 106.600 -1.3% Ford Motor Credit Co
5.000 05/15/18 101.550 -0.3% Ford Motor Credit Co
8.125 01/15/20 121.100 -0.1% Ford Motor Credit Co
9.375 03/01/20 121.600 0.9% Ford Holdings
5.750 02/01/21 106.100 -0.2% Ford Motor Credit Co
5.750 06/20/21 100.350 0.6% Ford Motor Credit Co
5.875 08/02/21 105.757 0.0% Ford Motor Credit Co
9.215 09/15/21 120.100 1.3% Ford Mtr Co <<== sweet spot, IHMO
8.875 01/15/22 121.350 0.9% Ford Mtr Co Del
7.125 11/15/25 106.600 1.2% Ford Mtr Co Del
6.625 02/15/28 104.458 0.9% Ford Mtr Co Del
6.625 10/01/28 103.600 1.0% Ford Mtr Co Del
6.375 02/01/29 100.590 1.0% Ford Mtr Co Del
9.300 03/01/30 125.100 1.4% Ford Holdings Inc
7.450 07/16/31 118.100 0.5% Ford Mtr Co Del
8.900 01/15/32 122.475 1.3% Ford Mtr Co Del
7.750 06/15/43 105.475 1.2% Ford Mtr Co Del
7.400 11/01/46 102.975 1.0% Ford Mtr Co Del
7.700 05/15/97 100.900 -0.6% Ford Mtr Co Del

As you can see, price does matter, but not in the way that most bond investor expect, because it is only one of the factors that needs to be considered. Even at a price of 120 (plus a $10 commish), the 9.215’s of ’21 would offer a positive return after inflation. Whether the bond should be bought for that yield is a whole ‘nother matter that would involve looking to see what else was available from other issuers. But I suggest this. If a would-be bond investor owns none of Ford’s debt, and if he/she is trying to build a small bond portfolio, say of $100k or so, then picking up a single of Ford’s 9.215’s of ’21 might be a good place to start, given that both the market and the rating houses have confirmed that the trend for Ford's prospects is upward.

Charlie
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Standard Disclaimers: Nothing in this post should be construed as investment advice. The facts and opinions offered are merely starting points for further discussion.
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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33390 of 35357
Subject: Re: Ford’s Bonds Date: 10/21/2011 11:31 PM
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You are wasting your time even looking at the bonds. You want to be in the equity or the warrants if you like the Ford story and/or the auto cycle. End of story.

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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33391 of 35357
Subject: Re: Ford’s Bonds Date: 10/22/2011 9:16 AM
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Thank you for your oh so helpful opinion.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33392 of 35357
Subject: Re: Ford’s Bonds Date: 10/23/2011 5:57 PM
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At least I was concise. Who even reads your 30 paragraph rants on why you don't like some bond and how wonderful you think you are?

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33393 of 35357
Subject: Re: Ford’s Bonds Date: 10/23/2011 6:11 PM
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"At least I was concise. Who even reads your 30 paragraph rants on why you don't like some bond and how wonderful you think you are?"

Why get personal? Are there really that many, if any, posters who are as generous with sharing their thought process and investment selection as Charlie? I don't think so. His results speak volumes - he has a process and it has worked. This board, IMO, would be almost worthless without him.

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