General Motors Follows Ford Into Debt Markets

General Motors' finance arm is selling $2.5 billion of bonds on Tuesday, amid an uptick in auto sales and on the heels of a similar deal from rival Ford Motor Co. (F)

General Motors Financial Co. will use proceeds of the sale to fund a portion of the acquisition of Ally Financial Inc.'s automotive financing operations in Europe, Latin America and China. It will also use proceeds to repay certain debt to parent General Motors Co. (GM), as well as for working capital purposes, according to a regulatory filing.

GM Financial is offering three-, five- and 10-year debt to yield 2.75%, 3.25% and 4.25%, respectively. Demand was high enough that the deal was upsized from its original $2 billion.

Unlike Ford, which regained its investment-grade ratings from Moody's Investors Service and Fitch Ratings last spring, GM Financial is still rated in junk territory: Ba3 by Moody's and double-B by Fitch. As a result, Ford--which unlike GM and Chrysler did not file for bankruptcy as a result of the financial crisis--was able to get lower rates on its debt. Ford Motor Credit Co. priced three-year debt Monday to yield 1.733%, with a spread, or extra yield, of 1.40 percentage points more than comparable Treasurys, according to a term sheet.

"Auto companies go through cyclicality," said Jody Lurie, corporate credit analyst at Janney Capital Markets. "The summertime is when they start really focusing on building out their newer models for the coming year, and you see a pick up usually in sales as the year goes on. So in terms of financing needs, they want to prepare for that."

Despite the lower rating, GM Financial is coming to market at a time when yields on junk-rated debt are at record lows, saving the company on borrowing costs. The yield on the Barclays U.S. Corporate High Yield index ended Monday at 5.02%. At the end of 2008, yields were above 20%. With overall interest rates still low, investors hunting for yield have headed for riskier assets, pushing up prices.

In addition, the automakers' improving business since the financial crisis has attracted some bond investors. For April, Ford said its U.S. sales were up 18% that month over last year, while Chrysler and GM said their sales were both up 11%. The companies said it was the best April since the recession.

"We think there is a good fundamental story about the healing of an industry that has been beaten up pretty substantially," said Matt Toms, head of U.S. public fixed income at ING Investment Management, which oversees about $130 billion in fixed-income assets and owns some auto company bonds. "These are relatively attractive ways to earn some extra spread in this low-yield environment with some positive credit momentum."

Write to Mike Cherney at mike.cherney@dowjones.com

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Source: http://www.foxbusiness.com/news/2013/05/07/general-motors-follows-ford-into-debt-markets/

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