Volkswagen and BMW were among the auto-related issuers returning to the euro market in a booming week for investment-grade corporates, which saw supply total more than €27.5bn.
The week saw deals across the ratings spectrum and sectors, but what stood out was the return of the tariff-troubled original equipment manufacturers and component makers.
The deals followed in the slipstream of a €500m five-year issue from Swedish truckmaker Volvo, which received a warm response on May 9 when it brought the first euro offering from the sector since US president Donald Trump’s so-called reciprocal tariff announcement sent spreads soaring in April. The auto sector is also subject to specific tariffs from the US.
Volkswagen got the week off to strong start, showing that not only is the senior market open for autos but that investors would be happy to take on more risky hybrid paper.
Its €1.9bn green dual-tranche hybrid comprising €750m perpetual non-call November 2030 and €1.15bn perpetual non-call November 2033 notes caught the market’s attention with books peaking at more than €13.2bn.
Proceeds from the deal, Volkswagen’s first in euros this year, will refinance hybrids with call dates in 2025 and 2026. It had been anticipated as the June call date for its 3.50% €1.5bn hybrid drew closer.
Leads started the deal with initial price thoughts 55bp back of fair value on the non-call 2030s and 62.5bp back on the non-call 2033s but were able to print the notes at very tight levels as pricing came in by 75bp on both. That led a quarter of the book to fall away but final orders were still €9.85bn.
VW set the tone for the week. On Tuesday, BMW (A2/A) printed a €2.5bn triple-tranche deal comprising €1bn May 2028, €750m May 2031 and €750m November 2034 bonds priced at 55bp over swaps, plus 90bp and plus 120bp, respectively.
Peak demand of more than €8.7bn meant the issuer was able to print the shortest tranche 5bp inside fair value and the other two notes flat to its curve. As well as pulling in pricing, BMW upsized the deal from an expected €2bn across the three tranches.
Other issuers, including US truckmaker Paccar, and more exposed parts manufacturers such as Canada's Magna International and Germany's Continental were also able to get in on the action, as was French high-yield credit Valeo.
“It seems that the market is really focused on short-term news,” said Boutaina Deixonne, head of euro investment-grade and high-yield credit at AXA Investment Managers, explaining the demand for the deals.
In particular, news of a thawing in trade tensions between the US and China and suggestions of progress around a ceasefire in Ukraine boosted the credit market.
“People see value in autos at these levels,” said a DCM banker, familiar with some of the week's deals from the sector. “Volkswagen printed at a 200bp senior-sub spread, and investors can see it going to 150bp. If tariff news continues in the right direction, then you probably [won't] be able to buy what are at the end of the day high-quality credits at these levels.”
There are also technical reasons driving demand. Going into the year, many investors were underweight the sector, but as more supply comes through, they are buying bonds so as not to stray too far from the benchmark.
A bumpy road
Whether those valuations compensate for the problems facing the sector is another question, said Deixonne.
“It’s really hard to believe that there will be no impact for autos from tariffs,” she said. “At the end of the day tariffs will be higher than they were before.”
Aside from tariffs, manufacturers, particularly in Europe, are under pressure from Chinese competitors, the transition to electric vehicles and a weaker economic outlook.
For some investors, spreads are not wide enough to make the sector appealing, especially as spreads have recovered from the wides of mid-April. The iBoxx Euro Automobiles & Parts index is only a couple of basis points back from where it was, in asset spread terms, on April 2, at 132bp. On April 9 it had jumped to 161bp.
In the US too, spreads have recovered. “Given the tariff news, we have seen some dispersion emerge when you look at, for instance, Triple B autos," said Tim Crawmer, global credit strategist at Payden & Rygel. "Some of those cuspier names, you saw those really get punished in April. Most of them have come back and recovered all that widening.”
That should mean the window for issuance stays open a while longer until the impact of tariffs on bottom lines comes through.
“In the next three months or so we might have some negative headlines in the sector after we see the impact of tariffs in Q2 earnings but also the effect of slower consumer spending – that could potentially push spreads wider than before," said Deixonne.
Additional reporting by Sunny Oh