Ford Driven to New Bond Setup by Desire for Liquidity

Its $8.6 billion sale Friday is part of a bigger plan by the carmaker.
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What's good for

General Motors

(GM) - Get Report

is good for America. And what's good for


(F) - Get Report

is good for ... America's bond market?

Today, Ford and its financing unit,

Ford Motor Credit

, sold $8.6 billion in securities -- the most ever -- under a new financing program called Global Landmark Securities. Lofty name, if a mouthful. But what makes this bond different from all other bonds? And what does it mean for the markets and for investors?

Well, to begin with, this sale isn't much of a change from other Ford bond sales. Except that there's a whole Expedition-load of these, and the market is going to see a lot more in coming years.

Last month the company said it plans to sell at least $3 billion of bonds between two and four times per year, or $6 billion to $12 billion a year. These bonds won't be offered more than once a quarter, and the market will get more than the usual advance word as to when a sale is planned.

This sounds familiar. In fact, it sounds like quarterly Treasury auctions, which the bond market makes ready for weeks in advance of the actual event.

Repeat Visitors

Generally, corporations sell debt whenever they feel like it, as long as the conditions enable them to get their money cheaply and walk away happy. But that doesn't always satisfy investors, especially with billion-dollar bond sales hitting the market with regularity this year.

Maybe Ford's been pressing the repeat button on the Kinks'

Give the People What They Want

album, but the carmaker appears intent on becoming a much more predictable presence in the bond market in coming quarters.

"They're not going to be doing any more funding than before -- it's a reconfiguration of their funding to address investors' preference for liquidity," said Paul Young, co-head of global debt syndication at

Salomon Smith Barney

, one of the deal's three underwriters.

In the wake of the

Long Term Capital Management

debacle, investors didn't want anything but the safest, most easily tradable (or liquid) bonds. Treasuries are the safest, because they carry no risk, and the market for them is huge -- everybody owns them, so people agree on their value (give or take a little).

Corporate issuers found the only way they could sell bonds late last year and early this year was to do the same -- offer more than a billion dollars' worth of bonds to ensure liquidity.

Eventually, this became a crutch for a still-skittish market. When investors heard about a giant deal in the offing, furious selling of corporate and Treasury bonds would follow, creating a level of volatility in the market that didn't exist last year, when more people were trading. Even though the market has calmed down, investors continue to look for companies to sell bonds that facilitate the easiest trading after the actual sale.

"We have wider

yield spreads than last year," said Mitch Stapley, chief fixed-income officer at

Kent Funds

. "We've not recovered totally from the scare of last fall. And the reality is, dealers that used to serve as a cushion by taking on supply will no longer do that."

Rather than scare kids out of the pool every time they cannonball into the deep end, Ford developed this methodical, quasigovernment program. Execs met with investors about it last month in the U.S., Europe and Asia.

Then chaos set in. Bond investors started talking up a giant $3 billion deal that was planned just before the end of the quarter and the

Federal Reserve's

June meeting -- the last possible time investors wanted to deal with a giant corporate deal. The market freaked out and sold off wildly, before Ford said it wouldn't be bringing a transaction until July. (Underwriters today clung to the

story that no actual sale was planned for June, though four different investors confirmed premarketing activity was taking place.)

Having apparently learned its lesson, the company this week slowly gauged interest from investors -- which was pretty darn high. Interest in the deal totaled $14 billion, and the deal expanded to $8.6 billion from $6.5 billion.

Coming Back?

Ford has not commented on whether it plans to sell bonds later this year. If Ford does as planned and begins to issue bonds on a predictable, quarterly basis, investors will get ready for those deals further in advance of those offerings. It would also create the perception that these bonds are a benchmark for which to weigh against a universe of corporate bonds. Investors like benchmarks -- and the shrinking Treasury market is a bit less useful than in the past due to the government's desire to reduce the national debt.

Salomon's Young hinted at even more ambitious pursuits for Ford's program, such as the "positive technical aspects" and perhaps developing a "corporate repo" market. The repurchasing, or repo, market is where traders lend money in exchange for securities held as collateral. This is generally the province of Treasury securities, because it's such a large, liquid market, but Young thinks a new one might develop if the dozen or so other large companies that can issue this amount of debt per year utilize programs such as this.

For the individual investor, today's sale is less important. Most individuals buy bonds (with the exception of savings bonds) through funds -- those that do buy them individually are generally dealing with Treasury bonds, rather than corporate bonds, which are first offered to the institutional community.