How to effectively manage a credit

One example from the automotive sector is the large spread differential between Ford and Renault bonds with similar coupon and maturity.

Although the rating agencies assign approximately the same credit risk to both issuers, investors view the risk that is related to owning Ford bonds as significantly higher. It clearly outlines that Ford bonds have been much more volatile than Renault bonds between September 2003 and February 2004. When S&P put Ford on credit watch negative on October 21, 2003, spreads widened massively. Even if only very few investors feared a multiple notch downgrade of Ford from the then BBB rating, a 1 notch downgrade to BBB coupled with a negative outlook would have caused concerns about a later downgrade of Ford into high-yield. There were fears that the high-yield market would not be able to absorb the large volume of outstanding Ford bonds, and from a fundamental perspective that the company’s financing costs would rise, thus limiting the company’s financial flexibility massively. This example highlights that market technicals at least temporarily can be the dominant driver of credit spreads.

From its beginnings in Milwaukee in 1909, Harley-Davidson has enjoyed a long history as America’s foremost motorbike manufacturer. However, by the early 1980s its reputation and business were in serious trouble following a sustained onslaught from affordable, high-quality Japanese machines produced by companies such as Honda and Kawasaki. Following a management buy-out, Harley-Davidson tackled its product-quality problems using the techniques of W. Edwards Deming (ironically, an American whose quality methods transformed Japanese manufacturing). The next challenge was to win back and maintain market share.

This the company achieved, once again becoming America’s leading motorbike manufacturer, with an amazing 90% of Harley-Davidson customers staying loyal to the company.