“Auto sales came to a screeching halt in March,” says Friedman, “but data out of China has already suggested that auto sales actually rebounded pretty quickly in China when they were three months into their coronavirus. And we think auto sales in the U.S. are going to be OK through this, especially as consumers potentially don’t want to fly as much and take drive-to vacations.”
Ford’s woes are a good indication of the troubles low-margin, cash burning, coronavirus-plagued businesses have seen. The company said in April it had $34 billion in revenue in the first quarter yet lost $600 million in adjusted EBIT. That came amid its announcement that it was issuing $8 billion in newly high-yield, unsecured debt in three tranches, $3.5 billion due in 2023 with a coupon of 8.5%; $3.5 billion due in 2025 with a 9% coupon; and $1 billion of debt due in 2030 with a 9.625% coupon.
S&P Global Intelligence said: “Due to the timing of the S&P Global Ratings downgrade, Ford's debt is eligible for the liquidity backstops that the Federal Reserve expanded on April 9, to support issuers and bonds affected by fallen-angel downgrades after March 22.”
The Fed moves caused spread compression in both the investment-grade and high-yield spaces. “The average high-yield spread is 66% of the way back to its 15-year median of 4.66%, while the investment-grade spread is 79% of the way back to its median of 1.36%,” said LPL in a commentary. “While valuations still lean attractive, spread compression may not be a major driver of returns looking forward, for investment-grade corporates.”
Usually, wider yield spreads lure bond investors, Friedman says. Though the market has snapped back in a lot of ways and those spreads have tightened after the Fed’s moves, the spreads are still fairly attractive. “As we sit here today, high-yield spreads are around 770 basis points, which has tightened in over 300 basis points from the March 23 wide levels of 1140 basis points. The long-term average for high yield spreads is about 550.” The wider average spreads augur both downside protection and equity-like returns, he says.