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Friday, 17 November 2017

DCM 2006 - Unrated success

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The bond markets have become increasingly important as a source of funding for German car manufacturer Porsche, which found that the lack of a credit rating was no barrier to a successful bond market visit earlier this year. After finding a strong Asian bid for its US dollar perpetual, the issuer found similarly strong demand for its euro senior benchmarks. Helen Bartholomew reports.

Porsche might not be a bond market regular, but earlier this year it encountered an overwhelming response to a three-part transaction consisting of a US dollar-denominated subordinated bond and euro-denominated senior benchmarks in five and 10-year maturities. For many issuers tapping the market in benchmark size, a credit rating is prerequisite, but for Porsche the lack of a rating posed no problem to generating hefty order books on all three bonds.

"We never considered a public credit rating as there has been no need for Porsche in the past and we see no need in the present or the future. We were not penalised by the lack of one, as both the US dollar perpetual and the Eurobonds were heavily oversubscribed and the coupons came in line with issuers such as BMW," said Henrik Haenche, group treasurer at Porsche.

Although corporate hybrids made their mark in the Eurobond market in 2005, Porsche became the first European corporate to offer the product in US dollars to Asian retail investors. For the issuer, the transaction represents a currency hedge, offset by receivables in US dollars from vehicle exports. Given the lack of any ratings benefit, the bond was triggered by the fact that it generates full equity accounting treatment under IFRS and offers a cheap alternative to equity with a tax-deductible 7.20% coupon against a 15%–20% cost of equity. It also provides long-term financing and, given that there is no step-up after the bonds become callable in year five, the transaction is more likely than most similar issues to remain in the market following the call date.

"We have a very conservative financing strategy and want to be financed long-term so the perpetual bond made sense. Since there is no step-up, there is no need for us to call the bonds. With the perpetual bond, we have long-term financial resources available without interest rate risk," said Haenche.

For the corporate hybrid market, the subordinated transaction was significant in highlighting the demand for such products in Asia, and although there have so far been no follow-on transactions from European issuers, the fact that the US$1bn deal generated almost US$5bn of orders, suggests that it will not be too long before others follow. For European issuers, Asia continues to provide strong demand, with some US$6.5trn sitting in Asian private banks. “Asia’s high savings rate has contributed to a massive increase in the region’s liquidity and wealthy individuals are trying to beat low deposit rates by shopping around in the fixed-income markets,” said Jack Gunn, head of Merrill Lynch’s Pacific Rim debt syndicate.

And while Porsche's rationale for the bond was in part to diversify the investor base, bankers are quick to note that the arbitrage available in dollars compared with euros remains attractive. For Porsche, the expectation of rising interest rates was one trigger behind timing on the transaction given that there is uncertainty over demand for such a product in a higher-rate environment.

The senior tranches also generated very strong interest with €6bn of orders pushing pricing to the tight end of both ranges. The five-year paid 28bp over mid-swaps, while the 10-year paid plus 48bp, although the hefty order book failed to translate into a smooth aftermarket as the bonds encountered some extreme volatility on the break. While the five-year remained relatively stable, the 10-year quickly drifted wider by as much as 8bp mid-week. But stability soon returned and, for Porsche, the bond markets appear to remain wide open without the need for a credit rating. While it is unlikely to become a regular issuer, this avenue will continue to represent a significant part of the issuer's funding strategy.

"The bond market will remain a very important source of funding in the future, but we do not intend to tap it in the short to mid-term. We prefer the bond market to the bank market as it offers more flexibility and freedom. We do not have any bank liabilities or credit lines in place as they can easily be taken away, which is what we learned in the early 90s when Porsche relied on credit lines," said Haenche.

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