Toyota Motor Credit was poised on Friday to become the first auto credit to hit the high-grade bond market this month, testing demand for a sector hit hard by the coronavirus pandemic.
The finance arm of the Japanese car manufacturer is hitting the market on the back of record issuance volume in US high-grade last week and a dramatic shift in sentiment as the Federal Reserve and Congress move to support the markets and the economy.
While auto parts companies and stores tapped the bond market last week, no major car company has raised dollar bond funding since the coronavirus pandemic started to roil markets.
"Being rated A1/AA–, Toyota Motor Credit is the best credit to reopen the market for autos," said one banker.
Even so, Toyota comes as the automotive industry is being pummelled by plant closures and diminished consumer demand for big purchases are hurting the industry.
And this was being reflected in spread levels after the borrower approached investors with initial price thoughts of Treasuries plus 280bp area on a three-year and five-year and 290bp over on a 10-year.
"It looks like they are coming 70bp or 80bp back to their existing curve, which is pretty cheap for a AA– name," said the banker.
Citing the impact of the pandemic, Moody's downgraded Toyota to A1 from Aa3 earlier this week and placed its ratings on review for further downgrades.
Moody's also issued downgrades for Honda, Nissan and Yamaha as well as six issuers that are automotive parts suppliers.
Ford was made a fallen angel after S&P downgraded it to junk and many believe GM could be next.
Much of this has already been priced into the market with both GM and Ford bonds already trading as if they were Single B or Triple C, according to CreditSights.
"These credits and the entire automotive sector will likely remain stressed for at least a few months until we have clarity on the impact of the shut down and any lingering supply chain ramp up issues and an appreciation for a new normal sales environment," the research firm said.
Furthermore, the automotive sector has the second widest average spreads of any sector in the high-grade universe at 580bp over Treasuries, according to ICE BofA data.
Bankers have been gauging investor appetite on potential deals for the auto sector, which is seen as a broader barometer for sentiment about global economic growth.
But so far many accounts have been pushing back.
"For many investors sentiment toward autos is pretty negative and many are not even willing to look at the sector," the banker said.
That said, the buyside has been piling into the primary market and picking up high-quality names on the cheap and Toyota could benefit from such demand.
"Average coupons this week are around 3.6%, with some in the mid to high 4s and even 5s and the majority have been single A issues," said the banker.
"On a risk-adjusted basis, certain accounts see that as pretty attractive for short-term allocations in their portfolios."
That comes despite another record outflow for the asset class, with investors yanking US$38.02bn from the asset class for the week ending March 25, according to Lipper.
Toyota joined another five borrowers on Friday to take the week's tally to 48, with the issuance volumes for the week poised to be more than US$100bn.
Credit Suisse, utility Xcel Energy, marketing company Omnicom, media conglomerate Viacom, and Ecolab were also funding in the US dollar bond market on Friday.