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Rob Carrick

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Automobiles: The Big Three's struggle

Rob Carrick

The past year was another bad one for the gang that couldn't drive straight, otherwise known as the Big Three North American automakers.

Ford posted a 12-per-cent sales decline in the U.S. market that gave the company its seventh-consecutive year of falling sales. General Motors stumbled through an eighth consecutive year of U.S. sales declines, while Chrysler, recently taken private by the buyout firm Cerberus Capital Management, fell 3.1 per cent. Adding to this sad commentary is the fact that Ford lost its traditional Number Two position in the U.S. market to Toyota last year, while Chrysler fell to fourth position. Globally, Toyota is challenging GM's decades-long sales supremacy.

The Big Three are building better, more reliable cars these days, and yet they're struggling mightily just to regain their equilibrium, never mind become anything close to the force they once were. Investing in the shares of these companies is a gamble, then. A better-than-forecast quarter of sales or profits might boost an automaker's stock, while disappointing figures will send it lower. If you catch the swings right, you could make some money. Bear in mind, however, that both Ford and GM shares both lost about 20 per cent in 2007. Ford shares lost a cumulative 37 per cent over the past five years, GM shares almost 39 per cent. Ford suspended its dividend back in 2006 while GM has slashed its quarterly payout.

At some point, Ford and GM might turn out to be an incredible turnaround play. For now, though, the smart, if still risky, play for retail investors is to buy the bonds of their retail financing arms here in Canada. Both Ford Credit Canada Ltd. and General Motors Acceptance Corp. of Canada are active in providing loans and leases to people buying Ford and GM vehicles. Given the low default rate on borrowing here in Canada and firm economic outlook, the underlying assets of these financing arms are strong. Unfortunately, the overall risk profile of Ford Credit and GMAC bonds is a little more complicated.

GMAC is also a mortgage lender in the United States, which is a problem these days given the state of the real estate market south of the border. Dominion Bond Rating Service recently downgraded GMAC and GMAC Canada bonds to BB-high from BBB (low), citing the drain on earnings caused by the company's mortgage activities. DBRS said the auto finance and insurance activities at GMAC show positive momentum, but it still has a negative outlook on the company's debt. Note: General Motors sold a 51-per-cent interest in GMAC to a consortium of investors back in 2006.

DBRS last fall confirmed Ford Credit's B (high) rating with a negative outlook based on uncertainties relating to Ford's attempts to turn things around. As DBRS put it, Ford Credit's success is "is highly dependent on the success of the parent."

What these ratings tell you about Ford Credit and GMAC bonds is that they're speculative and should not be regarded as being anything like a bank-issued guaranteed investment certificate or government. Technically, they're high-yield bonds, which means higher than normal returns and risk. If you're game to buy in, here are a few ground rules:

Ford Credit and GMAC bonds are plentiful, so retail investors shouldn't have much trouble finding a decent selection at most brokers. Be careful with these bonds, though. They offer a safe ride than the shares issued by these two companies, but they're not going to appear on anyone's list of safe investments.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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