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Ford Shares Surge After the Fed Backstops New Corporate Debt

What happened

Shares of Ford Motor Company (NYSE: F) were rising on Thursday after the U.S. Federal Reserve expanded a corporate-lending program to include companies with credit ratings that have been downgraded recently to just below investment-grade status. Ford is one of those companies.

As of noon EDT, Ford's shares were up about 9.2% from Wednesday's closing price.

So what

As part of a series of moves to help support the U.S. economy through the coronavirus pandemic, the Fed expanded a corporate-debt guarantee program to include so-called "fallen angel" companies.

Fallen angels are companies that had investment-grade credit ratings, BBB or higher, as of mid-March, but have since been downgraded by one notch to BB, just below investment grade. Until Thursday, the Fed's guarantees were limited to companies with ratings of BBB or higher.

Ford headquarters in Dearborn, Mich. Image source: Ford Motor Company.

Ford is one of those companies. Its credit rating was cut to just below investment grade by Standard & Poor's on March 26, officially dropping Ford to speculative or junk status. (Moody's cut Ford to the equivalent of BB+ in September of 2019. Fitch continues to maintain a BBB- rating on Ford, but two out of three is all it takes.)

The Fed's move means that Ford can now raise additional funds (if needed) by issuing bonds insured by the Federal Reserve.

Now what

This doesn't mean that Ford has received a bailout, or that it has taken on any new debt as of now. What it means is that if Ford chooses to raise money via a bond issue, investors who buy those bonds will do so with the confidence that they're insured by the Federal Reserve. (Put another way: If Ford goes bankrupt -- not likely, but possible -- the buyers of the bonds will still get paid.)

While the automaker had plenty of cash at the beginning of the crisis, it is burning that cash quickly as long as its factories stay closed. The Fed's action gives Ford investors some peace of mind: At least for the duration of the current crisis, it will be able to raise more cash if needed.

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John Rosevear owns shares of Ford. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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