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Quality Beat

26 April 2019 by jbchevrel

Ford (F) was the best performing CDS in the CDX IG today, with 5y closing -41bp, a c20% relative move on the spread. That gets us back to the middle of the 5y range, at c170bp, between an early 2018 low of c80bp and an early 2019 wide of c280bp. Cash rallied pretty in line, with 4.35 26s tightening c36bp to swaps. F posted a strong beat overnight with EPS of 44c vs. est. 26c, with an Auto revenue broadly in line ($37.2B vs. est. $37.0B) and an Auto EBIT $300M higher. Region-wise, the auto company cited much better results in North America (although Q1-19 was the weakest quarter for household spending in 5y). The stock was up c10% and the 5y CDS went up to -50bp tighter in LDN trading time. The headline *FORD SAYS U.S. OPENS CRIMINAL PROBE OF EMISSIONS CERTIFICATION came at 1330 LT and stopped the rally, without spurring a reversal. F responded quickly, saying they are cooperating with all US agencies. For reference, they had said in FEB they had been wrong to use road-load specifications to simulate how aerodynamic drag and tire friction can impact fuel consumption. Historically, VW had paid $4.3B in 2017 for misleading regulators/customers about its diesel engines’ emissions. More recently FCAIM recalled 863k vehicles because they violated pollution standards. But F said the potential violations do not involve 'defeat devices' like those used in some VW diesel engines to deliberately cheat US emissions testing. So not enough to worry the credit market at this stage. Still rated BBBn/Baa3n/BBBs, F remains one of the widest names in CDX IG, but went from #1 to #3 in this move, now behind NWL and FD. F’s competitor GM was dragged -15bp, but let’s bear in mind that they will report next Tuesday.