A key borrowing spigot opens for Ford

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A handful of investors recently began extending short-term loans to an affiliate of Ford Motor Co. (NYSE:F) after more than a decadelong hiatus, opening a key borrowing spigot for the blue-chip auto maker, which was locked out of money markets in the last recession.

In recent months, a money-market fund of Federated Investors has been buying a kind of short-term IOU called "commercial paper" from Ford Motor Credit Co. LLC. The Federated Capital Reserves Fund now holds about $148 million of debt, according to fund tracker Crane Data.

Ford Motor Credit has made a comeback since being struck off Federated's eligible investments list in 2003, when the vehicle-financing company showed signs of struggling and was later downgraded to below-investment grade. It has since been upgraded to investment grade.

The Federated holding, while small, is notable because it signals a potential thaw in relations between money funds and auto companies that could later benefit others, including General Motors Co. (NYSE:GM) and Fiat Chrysler Automobiles NV (NYSE:FCAU). GM and Chrysler Group LLC filed for bankruptcy in 2009.

"Autos are generally tied to the consumer, and the consumer, we think, is very healthy right now," said Debbie Cunningham, chief investment officer for money markets at Federated in Pittsburgh

She said auto loans are generally the highest priority payment for consumers, behind mortgages, and thus offer a solid investment for funds willing to consider issuers in the lower tier of the highest short-term rating categories.

Robert Cheddar, portfolio manager at PFM Asset Management LLC, which manages about $63 billion on behalf of state and local governments, said Ford's fundamental condition has improved. For clients that will allow it, he started buying the company's commercial paper last year.

Ford Motor Credit had $4.98 billion of commercial paper as of March 31 and is "a much stronger credit" today, said Stephen Brown, senior director at Fitch Ratings. Last May, Fitch upgraded the issuer's commercial paper program to F2, equivalent to the second lowest rung of investment grade, from F3.

Ford Motor Credit declined to comment.

The interest from Federated reflects the yield offered on the debt -- about 1.3%, above what is available on short-term Treasurys and bank commercial paper -- as well as Ford's progress in returning to better health.

It also points to an increasing appetite among large money managers using separately managed accounts to oversee client money. Crane Data calculates that separately managed accounts have grown by as much as $40 billion to $500 billion since new Securities and Exchange Commission rules for traditional money-market funds came in last October.

"It's mostly separate accounts and corporate investors that are buying [Ford's commercial] paper," said Mr. Cheddar at PFM.

Commercial paper, which is typically issued anywhere from overnight to 270 days, is generally considered one of the cheapest forms of borrowing because most issuers have high credit ratings and investors loan their cash over short periods.

Most money funds never buy commercial paper rated below the top rung of investment grade. But the new SEC rules removed rating requirements for money-market funds. Previously, funds were required to invest at least 97% of their assets in securities with only the highest short-term credit ratings.

In 2016, Ford tapped the longer-term debt markets for the first time in nearly four years, raising $2.8 billion. While Ford Motor Credit was locked out money markets in the financial crisis, it used other sources of funding such as selling bonds backed by future revenues from car loans, as well as credit facilities from banks.