(Recasts to reflect sale; adds pricing information)
By Dena Aubin
NEW YORK, Nov 17 (Reuters) - Ford Motor Co.'s finance arm sold $1 billion of 10-year notes on Monday, taking advantage of strong demand after winning a stable rating outlook from a leading rating agency last week.
The issue came days after Standard & Poor's cut its ratings on Ford to the lowest investment grade but indicated the auto giant would not likely be downgraded again for the next two years.
"Sentiment is definitely bullish on the back of that," said Simon Ballard, global credit strategist for Bear Stearns. "The auto sector is really one of the last pockets of broad relative value in the corporate market."
Ford's bonds have rallied dramatically since last Wednesday's decision by S&P. The markets had feared S&P would assign a negative outlook when it cut Ford to "BBB-minus," opening the door to another downgrade to junk territory.
"The one-notch downgrade was priced in and the stable outlook saved the day as far as the automakers and investors were concerned," Ballard said.
A Ford spokesman said proceeds will be used for general corporate purposes.
BENEFITING FROM TREASURY RALLY
The offering from Ford Motor Credit Co. was priced to yield 2.57 percentage points more than comparable U.S. Treasuries, compared with expected yield spreads of 2.57 to 2.60 percentage points over Treasuries.
The issue is a reopening of $2 billion of 7 percent notes due 2013 originally sold in September at yield spreads of 2.80 percentage points more than Treasuries.
Those notes were the most actively traded issue in the corporate bond market last week, with nearly $1.4 billion changing hands, according to MarketAxess.
"We've been saying all along we think autos are going to do better in this environment, and yield spreads are still wide compared to other 'triple-B-rated' corporates," said Cindy Cole, portfolio manager for National City Investment Management Co. She owns Ford bonds and was looking at the new deal.
In a sign of healthy demand, yield spreads on the new notes tightened about 0.05 percentage point in the secondary market to a bid of 2.52 percentage points over Treasuries, traders said.
Comparably rated U.S. industrial bonds on average yield about 1.43 percentage points more than Treasuries, according to Merrill Lynch & Co.
Ford and its finance arm have a combined debt load of about $180 billion, including about $60 billion in the Lehman Brothers Credit Index, a widely followed gauge of the U.S. corporate bond market.
Ford is reaping the benefits of falling yields on benchmark U.S. Treasury notes as well as the rally in its own bonds, which has pushed their yield spreads tighter relative to Treasuries in recent days, investors said.
Ford's overall borrowing costs are about 0.75 percentage point lower than they would have been a week ago, translating into about $75 million in interest savings over the life of the $1 billion 10-year issue, said Peter Palfrey, portfolio manager for Loomis Sayles & Co.
"People believe that over the next 12 to 18 months, interest rates and Treasury yields are likely to be higher," said Palfrey. "From a treasurer's standpoint, to the extent they have funding needs over the next 12 to 18 months, it might be good to take care of that now."
J.P. Morgan and Citigroup managed the sale. Moody's Investors Service last week affirmed its "A3" rating on Ford Motor Credit while Fitch Ratings affirmed its "BBB-plus" rating. (Additional reporting by Caryn Trokie)