DETROIT (Bloomberg) -- Ford Motor Co.'s probable boost to an investment-grade credit rating puts the automaker in position to reach more investors and lead a pack of auto-industry companies back out of junk-bond territory.
Ford, the fourth-largest issuer of junk bonds last year, aims to lower its financing costs by losing its speculative label for the first time since 2005.
General Motors Co., TRW Automotive Holdings Corp. and Goodyear Tire & Rubber Co. may follow Ford by achieving investment-grade ratings by 2012, said Eric Selle, a JPMorgan Chase & Co. debt analyst in New York.
"I feel very confident that half of our universe is going to be investment grade by the end of 2012," said Selle, referring to U.S. companies in the auto industry.
He predicts Ford will return to investment grade by year's end.
Some borrowing is already at low-risk rates. The market for speculative debt has grown to $1.08 trillion from $592 billion on May 5, 2005, when Ford and the predecessor of GM first landed there six years ago, according to the Bank of America Merrill Lynch high-yield index.
Ford's return to investment grade may further lower interest costs, improve the company's image and allow it to regain control of assets used as collateral in 2006.
Most of all, it allows Ford to reach lenders it currently can't.
"There is a very large investment-grade investor base who today cannot or will not buy our unsecured debt because of ratings," Ford Treasurer Neil Schloss said. "When you're investment grade, you're thought of well, but when you're non-investment grade, the capital markets think of you as speculative."
Ford's $24 billion in junk-rated debt outstanding is the most of any issuer.
Company leaders will meet with equity investors tomorrow in Wilmington, Del., for its annual shareholders' meeting. Ford may reach investment grade by the end of this year, Bruce Clark, senior vice president and analyst at Moody's Investors Service, said in an interview last month.
The ratings company is monitoring Ford's negotiations with the United Auto Workers on a contract to replace the one that expires Sept. 14, he said.
"They're certainly on a glide path towards investment- grade ratings," Clark said. "The issue is not: 'Will they get there?' It's a matter of the timing."
Ford's current Ba2 rating is two steps from investment-grade. A two-level upgrade is possible, even if it's not typical, Clark said.
While GM is on a similar path, it lacks the positive outlook Moody's has on Ford, he said. Ford is rated BB- by Standard & Poor's, three steps below investment grade.
"Once Ford does get there, it's going to open up the floodgates because everybody is searching for yield," Selle said.
It's a turnaround for the industry just two years after the bankruptcy of automakers and suppliers representing 38 percent of the North American auto industry, including General Motors Corp., Chrysler LLC and Lear Corp., according to a 2010 analysis by consulting firm AlixPartners LLP.
Lear, rated BB by S&P, and Dana Holding Corp., at BB-, may join GM in returning to the high-grade market in 2012; Tenneco Inc., also at BB-, may be either 2012 or 2013 with Tower Automotive Holdings, American Axle & Manufacturing Holdings Inc., rated B+ by S&P, probably among suppliers upgraded in 2013, Selle said.
U.S. speculative-grade companies pay 3.4 percentage points more to borrow from bond investors than their investment-grade counterparts, Bank of America Merrill Lynch index data show.
U.S. high-yield bonds paid an average 7.23 percent yield-to- maturity as of yesterday, compared to 3.83 percent on high-grade notes, the data show.
S&P is monitoring Ford's cash flow and European operations among criteria for an upgrade, Robert Schulz, a ratings analyst, said in an interview, without speculating on timing.
GM has similar criteria, he said.
"On the way down and conversely now on the way back up there is more synchronicity than differences between Ford and GM," Schulz said.
GM has the same rating as Ford from both S&P and Moody's. Most suppliers have lower scores from both ratings companies. BorgWarner Inc., Johnson Controls Inc. and Magna International Inc. are already investment grade.
While S&P has made only "positive" ratings actions on auto-parts makers since the third quarter of 2009, it is less likely to elevate additional suppliers to investment grade than the automakers, Schulz said.
"We've taken all those upgrades but there are a lot of indirect risks that have been quiet for a while," Schulz said. "There could be more challenges ahead," such as rising commodity prices."
Fifth Third Asset Management is already including in its investment-grade fund debt issued by Lear among the portion set aside for BB-rated companies that are likely to become investment grade, said Grand Rapids, Mich.-based Mirko Mikelic, who helps manage a $13 billion fixed-income portfolio.
"It was a big shift when Ford went into the junk market in 2005 and when they come back, the investment-grade investors will have to have them in their funds again," Mikelic said, adding that his fund will probably add Ford once it reaches investment grade.
Ford has the largest share of outstanding high-yield bonds, accounting for 2.27 percent of Bank of America Merrill Lynch's U.S. High Yield Master II index.
In January 2005, before the automaker was downgraded, it comprised 2.8 percent of what is now Bank of America Merrill Lynch's U.S. Corporate Master index.
Bonds issued by Ford's financing unit are already at investment-grade yields, with notes sold on April 28 paying a 5 percent coupon, according to data compiled by Bloomberg.
"The recent borrowings we've been doing for Ford Credit are, the spreads are very close to investment grade now," Chief Financial Officer Lewis Booth said on an April 26 conference call. "So the lenders are recognizing the progress we've made on our balance sheet probably ahead of the investment rating agencies."
Over the past year, investors who can trade only in investment-grade companies have started showing up at credit conferences Ford conducts with traders, Schloss said.
Ford's $1.5 billion debt issue last month, known as Ford Upgrade Exchange Linked Notes, was rated investment-grade by Moody's and S&P.
The securities are backed by retail assets such as auto loans and will be exchanged for unsecured notes when Ford Credit is rated investment grade by two agencies.
About 80 percent of the orders came from investment-grade buyers, many of whom previously didn't purchase Ford bonds, Schloss said.
GM also has an objective to regain an investment-grade rating, Jim Cain, a spokesman, said in a telephone interview.
"There's not a timetable." GM has "significantly more total liquidity" and "substantially less automotive debt than Ford," Cain said.
Talisman Capital SA expects GM is "moving up the credit curve," President Geoffrey Tirman said in an interview. That's why the Chexbres, Switzerland-based investment fund is holding on to shares and warrants of GM that it received April 21 in exchange for bonds in the automaker's bankrupt predecessor, he said.
GM reorganized in Chapter 11 in 2009.
"We're inclined not to sell it right now," said Tirman, whose firm manages about $110 million in debt. Talisman bought into the debt issued by old GM toward the end of last year. An upgrade "opens up the company to a larger field of potential investors."
Chrysler Group LLC, the automaker operated by Fiat SpA, received ratings May 3 that are lower than GM and Ford.
S&P rated Chrysler B+, the fourth level below investment grade, with a stable outlook.
Moody's rated it B2, the fifth step into junk grade, with a positive outlook.
Executives at TRW, Goodyear and Lear have specifically mentioned a goal of reaching investment grade in the last year.
TRW is rated Ba2, two levels into speculative grade, by Moody's. Goodyear is one step lower at Ba3. "We believe Lear already has an investment-grade profile," said Matt Simoncini, Lear's chief financial officer.
For Ford, returning to investment grade is one of the hurdles it must cross to reclaim major assets -- including its trademark blue-oval logo -- that it used as collateral in 2006 in exchange for a $23 billion loan that allowed it to avoid bankruptcy.
Ford also must pay back $4.1 billion left in a term loan and $800 million on a revolving line of credit, Schloss said.
"Has there been a rallying cry around the blue oval to get to investment grade? Probably," Schloss said. "I think the bigger impact would be getting all our assets back and our reputation."