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Friday, 24 October 2014

Leading the pack

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  • Leading the pack
  • A cyclist passes the Autostadt delivery towers of German carmaker Volkswagen in Wolfsburg.

German car manufacturers dominated the corporate primary market at the start of the year and now have the luxury of reacting to market conditions rather than their funding needs.  

(To view the digital version of this report, please click here.)

The eurozone crisis might keep its sovereigns under pressure, but the region’s corporates, and German auto manufacturers in particular, managed to get out of the gates this year to a terrific start with successful and tight issuance.

With pension funds and insurance companies increasingly wary about throwing their cash at the indebted European governments, and the coupon of benchmark eurozone countries at all-time lows, corporate debt yields have appeared a generous option.

“Investors have shifted their attention from sovereigns, to supras and now to corporates,” said Roman Schmidt, global head of corporate finance at Commerzbank in Frankfurt.

Demand has been helped by a comparative scarcity of new paper. European corporates need to redeem €126bn maturing debt in 2012 – a relatively modest 66% of their new issuance last year, according to figures from Fitch. By February, investors had already put €12.5bn into European bond funds, the biggest inflow since August 2010, according to Morningstar, a fund analysis firm.

“Corporate treasurers couldn’t get issues out quickly enough. I am reminded of the buying frenzy of internet stock in 2001,” Schmidt said. How successful this issuance frenzy was in the first quarter can been seen in that the yield premium on corporate bonds to benchmark German government debt has narrowed 56bp this year to 145bp, according to Bank of America Merrill Lynch.

Traditionally early issuers, German car manufacturers have remained in pole position in 2012 with a story that investors have bought into thanks to a remarkably successful 2011.

“Investors have shifted their attention from sovereigns, to supras and now to corporates”

Munich-based BMW was first off the grid on January 4 with the largest European investment-grade corporate bond seen since German chemical and pharmaceutical giant Merck KGaA came to the market in March 2010. It was a hefty €2.5bn dual-tranche three-year and seven-year deal on the back of a €6.725bn book that priced at a tight 83bp and 125bp over mid-swaps respectively.

Stuttgart-based rivals Daimler-Benz has been as successful in the market. At the end of March it sold a €750m seven-year deal at mid-swaps plus 65bp. Less than three weeks previously it had attracted demand of around €2.5bn for an €750m five-year. That one priced at 2%, an all-time low coupon for a five-year corporate, on the back of an upgrade by S&P to A–.

Can’t get enough

Investors can’t seem to get enough of German auto paper. What is noticeable is not only the size of the books, but how small the new issue premia the car manufacturers are having to pay to borrow money. In Daimler’s case, the €750m deal priced at a premium of –2bp and in February – before the upgrade – it sold a €1bn three-year at mid-swaps plus 65bp, paying a premium of only around 5bp.

Even asset-based securitisation is being looked at once more as a serious funding option. “People are looking at ABS again, but they need ABS securities to be as transparent as possible,” said Schmidt.

At the beginning of March, for example, Wolfsburg-based Volkswagen printed an increased €1bn ABS from its VCL programme – VCL 15 – at the tightest level since November 2007. The structure of the deal is precisely what Schmidt is talking about. It is short – the senior tranche had a WAL of 1.28 years – and it has clear and familiar collateral. Perhaps the most significant sign for the doubters is that even mezzanine tranches are being sold. The Single A 1.88-year Tranche on this deal was 2.6 times oversubscribed.

Having played the climate of low long-term volatility and a rally in credit spreads so well in the first quarter, the result of this is that issuance pressure has been taken off the German car industry for the rest of the year. Daimler, for example, has €25bn outstanding debt and €3bn of that is due this year, much of which has been raised already. As Felix Orsini, Societe Generale’s global co-head of corporate DCM, said: “German auto manufacturers can now react to market conditions rather than their funding needs.”

But it was not just the good issuance climate that has allowed German auto manufacturers to keep their feet on the issuance accelerator. The reason for the success of the German carmakers as Tim Skeet, managing director in debt capital markets EMEA at RBS said, was the companies themselves. “These are real companies producing real products. They have had several years of reining themselves in and they are in good shape.”

Car registration figures from the European carmakers’ association ACEA put this into perspective. At first glance they look gloomy. Demand for new cars across the EU was negative for the sixth month running and posted a 7% decline in March, according to figures released in mid-April.

Registrations of cars made by French manufacturers PSA Peugeot Citroen and Renault – as well as Italy’s Fiat fell off a cliff – year on year –19.2%, –20.4% and –25.8% respectively. The bright light, however, was for German manufacturers. Europeans bought more cars made by Volkswagen, BMW, Mercedes-Benz and Audi than they did a year ago and – at 3.4% – Germany was the country to show the highest growth of new registrations.

Sustainability

As a result, the experience of car manufacturers outside Germany when they have come to the debt markets, especially those with hefty redemptions coming through, is very different indeed. Renault and Peugeot have to refinance €4.5bn and €2.9bn respectively this year. RCI Banque, the finance arm of Renault, for example, has managed to print three deals so far this year, but has had to pay up every time. Most recently, at the end of April, it coughed up what most estimate to be a 50bp–55bp premium on a €650m five-year.

The question remains at how sustainable the German car growth story is especially given the reliance that German auto manufacturers have on China. BMW saw sales in China leapt 41.1% while Daimler and Audi each saw Asia-Pacific increases up 18.9% and 32.8% last year. No one believes that that can last and most analysts are predicting single-digit growth for the future.

“A weaker and more competitive car market would weigh heavily on the profitability of some manufacturers, for whom China has been a significant source of earnings and cash over the past three to five years,” ratings agency Fitch warned in its most recent report of European car manufacturers and China singling out BMW, Daimler and Volkswagen.

Nonetheless, along with their product and other geographical diversification, the 6%–10% growth in car sales in China that most predict is enough to keep German carmakers in the issuance driving seat for the foreseeable future.

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