REFILE - Mercedes caught in tariff headlights
The bonds Mercedes-Benz issued yesterday traded sharply wider on the break a day after the Trump administration announced a 25% tariff on car imports starting April 3, a development that is expected to hurt European and other foreign carmakers.
Market participants said the timing of Mercedes' six-part bond offering was unfortunate. As leads were marketing the deal early Wednesday, news reports came in saying that the White House would unveil automotive tariffs that afternoon.
After yesterday's announcement of import duties, the new bonds, with two, three, five and 10-year tenors, performed poorly "across the curve" on Thursday, said one buyside source, who spotted the 10s trading 7bp wider in the secondary market.
On Wednesday, Mercedes' US financing subsidiary raised US$2.85bn in the bond market via leads Bank of America, BBVA, DBS, Goldman Sachs, ING and Societe Generale. The two, three, five and 10-year fixed-rate tranches landed at Treasuries plus 65bp, 75bp, 95bp and 115bp, respectively. The offering also had two and three-year floaters.
Despite the difficult backdrop, the German carmaker was able to price the A2/A rated notes with tight new-issue concessions of around 5bp, according to IFR calculations.
But the 144a/Reg S deal attracted a mere US$3.9bn of orders, making the deal around 1.4 times subscribed – well below the average 2.6 times subscription rate recorded across Wednesday's 12 US high-grade offerings, according to IFR data.
Market participants said the weak demand showed investors were aware that Mercedes and other major carmakers, as frequent borrowers, would come to the market later in the year. Patient investors could therefore wait for their next fundraisings when there may be more certainty on trade policy.
“Investors can afford to be a bit choosier as we see more supply," said a banker away from the deal. “You see that with issuers who are frequent borrowers like the autos, with people wondering about what tariffs might do for their business profile going forward.”
There was also a perception that Mercedes' bonds were more expensive than other carmakers', said a second buyside source. He said the company's spreads did not adequately reflect long-term headwinds facing its business, including concerns that competition from Chinese carmakers is hurting the profitability of its operations in the world's second largest economy.