Friday, 14 December 2018

Look East to fund

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  • Look East to fund
  • A VW emblem is pictured on a Volkswagen car in a delivery tower at the plant of German carmaker in Wolfsburg

In the aftermath of the emissions scandal, Volkswagen has turned to the Asian markets and taken asset-backed securities to heart.

It remains an international scandal. In September last year, German car manufacturer Volkswagen admitted that it had installed secret software to cheat US diesel emissions tests.

When the news broke, the push-back was immediate and the whole industry found itself under the microscope. Over the next two weeks, Volkswagen’s share price crashed from around €170 to €92, its five-year CDS jumped from 74bp to 306bp, it found itself embroiled in court cases across the world and had to book €16.2bn of provisions to cover risks.

Downgraded by the ratings agencies – it is now rated A3/BBB+/BBB+ with negative outlook by all three – and effectively shut out of the corporate bond market in the aftermath of the affair, VW turned instead to asset-backed securities for funding. In fact, it has printed a hefty €6bn since September 2015, much of it retained by VW.

“Retaining a material proportion of ABS has increased Volkswagen Bank’s on-balance-sheet assets. While the increased use of ABS enables maturity-matched funding, it also increases Volkswagen Bank’s risk-weighted assets, against which more capital has to be held, and subordinates senior unsecured bondholders to a greater degree,” said Bernhard Held, senior analyst at Moody’s in Frankfurt.

Even while news about the emissions scandal was still front page news, Volkswagen asked its relationship banks for up to €20bn in emergency short-term loans to shore up its balance sheet. It was a defensive move reminiscent of that used by BP after its Gulf of Mexico oil spill.

Since January, however, Volkswagen’s ABS issuance has been slick, targeted and multi-currency. It was out of the door efficiently with several issues, many of which had a distinct Asian flavour.

First off the mark was a Rmb3bn (US$460m) Driver China issue, Volkswagen Financial Services’ third Chinese auto ABS, which found distinct favour with both Chinese and international investors. The largest Chinese ABS ended up oversubscribed and with the tightest pricing of any auto ABS in the country. Tranche A has a fixed 3.30% rate, while tranche B is fixed at 5.10%. The portfolio comprises fixed-rate auto loans, with a weighted average life of 0.84 years, extended to 52,093 individuals. 

“We are significantly expanding our refinancing volume in renminbi generated by auto ABS,” said Frank Fiedler, CFO of Volkswagen Financial Services. “We will be expanding our refinancing volume via auto ABS in the international arena as planned and will be introducing our familiar ABS programme into further currency areas over the next few years.” 

That proved the case. The Chinese deal was swiftly followed by the largest auto ABS transaction ever issued in Japan. The senior tranche of the whopping ¥64bn (US$593.9m) issue priced at a tight 30bp over the base rate. And then, even before the ink was dry, the third deal followed, this time Down Under and off the company’s Driver Australia ABS programme. The AAA rated Class A notes, which have a WAL of 1.76 years, priced at the tight end of the BBSW plus 170bp–175bp range and the deal was upsized to A$500m (US$372m).

VW was also confident enough to dip its toes into the unsecured Chinese bond market, selling Rmb2bn of three-year onshore paper at 3.60%.

“The fact that we are now also active in the unsecured capital market in China following the establishment of our ABS programme is a consequence of our clearly defined refinancing strategy. It is our intention to refinance ourselves locally and do so with a diversified range of instruments,” said Fiedler.

Although the focus has been on ABS funding in APAC, Volkswagen has not ignored the rest of the world. Europe has remained, as always, a mainstay of funding. In January, Volkswagen brought the Driver Espana Three deal to market. Just shy of €1bn, it was the largest Spanish auto ABS transaction for several years. Nor did it price too badly. The senior tranche was placed at 105bp, in the middle of 100bp–110bp guidance. That was pretty much double the spread of the Driver Espana Two, which priced last year at 53bp over just as the news of the scandal was breaking, but it was still regarded as a success.

This was followed by VCL 23, a German auto deal in mid-April. There, the AAA rated €702m senior tranche went at one-month Euribor plus 55bp. Again, pricing was wide – certainly in comparison with last year’s pre-scandal VCL 21 at plus 20bp – but certainly an improvement.

Things are starting to look up. As Thomas Corcoran, principal analyst at Fitch in London, noted: “We believe that visibility of the total cost of the crisis has moderately improved.”

In the first three months of the year, the effect of the emissions incident on the company’s bottom line was dramatic. First-quarter figures showed pre-tax profits had fallen 20% to €3.2bn, down from €3.97bn in the quarter last year. But there is a glimmer at the end of the tunnel.

“In light of the wide range of challenges we are currently facing, we are satisfied overall with the start we have made to what will undoubtedly be a demanding fiscal year 2016,” said a relieved chief executive Matthias Mueller. “In the first quarter, we once again managed to limit the economic effects of the diesel issue and achieve respectable results under difficult conditions.” Analysts had predicted a drop in Q1 profits to €2.8bn.

At the end of May, Volkswagen was said to be looking at an imminent return to the European corporate bond market with a multi-billion euro deal to replace the short-term loans it had been relying on.

There is no doubt a deal would be welcomed. With the ECB now including the purchase of corporate paper in its QE programme, not only is there demand for bonds from lower rated corporates, but spreads for Volkswagen have come in so dramatically – around 170bp in the five-year space – that as a frequent borrower, it could get a deal away with only a small premium.

Volkswagen, it appears, has weathered the storm.


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