Friday, 18 January 2019

The route to rehabilitation

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  • The route to rehabilitation
  • Volkswagen

Following the emissions scandal in 2015, Volkswagen was locked out of the capital markets. But with a successful €8bn issue in March, the German car manufacturer is back.

It has been a long drive back to the capital markets for Volkswagen following a fraud dating back to 2006, when engineers for the German auto manufacturer realised that there was no chance of a new diesel engine meeting pollution standards in the US. The company’s solution to the problem was software that was then used to cheat emission tests.

When the news about the scam broke almost a decade later in September 2015, the push-back was immediate and the Wolfsburg-based company found itself shut out of polite society. Over the next couple of weeks, Volkswagen’s share price crashed from around €170 to €92, its five-year credit default swaps 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 initial risks stemming from the crisis – though the court cases keep on coming.

But there is a sign that the company has turned the corner.

“Our quarterly figures were positively impacted by the strong performance of the group brands, the launch of new, compelling products and solid earnings in western Europe,” said CEO Matthias Müller, presenting a 44% jump in the company’s Q1 profits in early May. “Our efforts to improve efficiency and productivity across all areas of the company are also paying off,” he added.

It is not all that has changed. Perhaps worst of all for a company that was the biggest issuer of corporate bonds in Europe from 2011 until late 2015, according to figures from Dealogic, Volkswagen was downgraded by the ratings agencies – it is now rated A3/BBB+/BBB+ with negative outlook by all three – and found itself locked out of the capital markets. Its €750m 0.75% August 2020s, for example, gapped out as far as mid-swaps plus 259bp.

Making the best of a bad hand, VW spent the last year as a slick and efficient issuer in the securitisation market - the one sector that remained open to it. Market soothsayers predicted that it was considering re-entry into the bond market when, in mid January, its Swedish subsidiary Scania saw significant demand for a €500m FRN.

It proved to be the case, and Volkswagen was able to return to polite society with a mammoth €8bn four-tranche bond at the end of March.

There were concessions on pricing it is true - around a 25bp pick-up at guidance that tightened in to roughly 15bp at pricing - but books that reached €24bn showed reinvigorated appetite for the name.

The two-year €2.5bn floating-rate tranche priced at 30bp over three-month Euribor; the €1.5bn four-year at mid-swaps plus 45bp; the €1.5bn six-year at mid-swaps plus 80bp; and the €2.5bn 10-year at mid-swaps plus 115bp.

By any stretch of the imagination, the €8bn bond got VW back in the game with one swing. It capitalised on the positive vibe with a new £850m deal from its financial services arm in early April, its first sterling transaction since 2015. Volkswagen Financial Services brought a two-tranche deal: a £500m four-year at Gilts plus 122bp and a £350m eight-year at Gilts plus 147bp. Both pieces were tightened significantly from guidance (13bp and 8bp, respectively) and confirmed that regular supply is now possible.

Confirmation that it was business as usual came in early June this year, when VW saw more than €11bn of combined orders for a dual-tranche €3.5bn hybrid. It sold a €1.5bn perpetual non-call 5.5-year at 2.75% and a €2bn non-call 10 at 3.875%, both comfortably in from guidance. All that is needed for full rehabilitation now is a US dollar bond, and the company has indicated that is likely at a suitable juncture in the second half of the year.

Flexing ABS

While VW’s re-entry to the bond markets has grabbed the headlines, the stable base of its funding remains, as before, the securitisation market. Most recently, in mid-May, it sold a successful A$466m (US$343m) ABS off its Driver Australia programme. It benefited both from the familiarity of the programme and a dearth of issuance this year. It is only the year’s second issue. As a result, the A$441m Class A notes priced at a tight BBSW plus 95bp - a solid 10bp in from initial price talk.

A sign of how much has changed is to compare the pricing of the Class A notes from Driver Three with Driver Four. The former printed at the height of the scandal, within only six months of the news breaking. Regarded as a success at the time, it priced at BBSW plus 170bp.

And soon afterwards it successfully brought the largest Spanish auto ABS since the financial crisis to market with a €1bn deal.

“The successful placement at an attractive price shows the confidence of investors in high-quality auto ABS and in the sustainability of the solid business model,” said Frank Fiedler, CFO of Volkswagen Financial Services.

The Class A and B notes were upsized from €685.5m to €914m and priced at a tight one-month Euribor plus 38bp, while the Class B notes came at plus 75bp.

But there has been a steady flow of funding over the last year. In February, it sold ¥60bn (US$527m) ABS into the Japanese market. A terrific success, it was upsized a third from an initial ¥40bn, was more than three times subscribed and saw the tightest pricing that VW has ever been able to achieve: only 8bp over the base rate.

And VW was confident enough in April to sell its second renminbi bond to date and the largest single tranche bond by an auto finance company in renminbi ever. Coming in at Rmb4bn (US$585m), the three-year paper had a coupon of 5.20%.

“Our second bond issue in China is an important step in intensifying our Chinese capital market activities,” said Bernd Bode, head of group treasury and investor relations at Volkswagen Financial Services. “It is our intention to refinance our growth in China locally within that country and in a diversified manner. That is why we are active on the Chinese financial market, both with our financial bonds and with our ABS programme as well.” 


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