(Updates with yield and book totals)
The German auto group opened books on a dual-tranche euro subordinated bond transaction on Monday via Barclays, Goldman Sachs, HSBC and Societe Generale.
Books have hit over €8bn, allowing the lead managers to fix the yields at 3.875% for a PerpNC7 and 4.75% for a PerpNC12, for a combined deal size of €3bn.
The German auto group opened books on the offering – its second ever in the format – with price thoughts in the 3.875% area and 4.875-5% range respectively.
Volkswagen is rated A3/A- at a senior level. The notes are expected to be rated Baa2/BBB and to print later in the session.
Proceeds will at least partially finance the German group’s €6.7bn offer to buy the portion of Sweden’s Scania it does not already own, in a quest to form a global truck business to rival Daimler’s.
Despite almost €25bn of euro corporate hybrids having priced in 2013, making it the busiest year on record, it remains rare for a company to issue such bonds with the express aim of financing M&A activity.
However, the cost of selling hybrid debt has continued to fall despite the all-time high supply as investors move down the credit curve.
Bankers said the proceeds would at least partially go towards Volkswagen’s €6.7bn acquisition of the remainder of Sweden’s Scania in a quest to form a global truck business.
Its 3.875% non-call September 2018 hybrids were bid around mid-swaps plus 211bp on Monday, while its 5.125% non-call September 2023s were bid around 230bp over, equating to respective yields of 2.96% and 3.95%. Volkswagen has senior bonds due in March 2021, January 2024 and March 2033 that were bid around swaps plus 50bp, plus 63bp and plus 66bp respectively. Those imply subordination premiums of between 205bp and 233bp based on the initial price thoughts.
Volkswagen’s previous hybrids printed with a premium over senior of 240-260bp.
The new offering comes less than a week after EnBW attracted a €5bn book for a 2076 NC7 hybrid deal.
Fund managers were divided on EnBW’s transaction. Some were fazed by the underlying issues facing the German utilities sector, but others proved keen to play, citing the still very attractive return prospects on corporate hybrid bonds.
In 2013, hybrids returned over 6%, compared to just 2.5% from senior IG corporate credit.
In an investor presentation, Volkswagen stated that in addition to financing the Scania acquisition, the rationale for selling hybrids was linked to the company’s “strong commitment to its rating and to bolstering its net liquidity position.”
The company described hybrids as “an efficient building block in our capital structure”.
