For Volkswagen, the full implications of the NOx emissions scandal, which broke in September 2015, are yet to be fully ascertained. The US is still calculating its fine, while the manufacturer is still developing its software fix.
Recent figures show VW Europe’s quarterly market share has hit a five-year low. Yet observers point out things could be considerably worse.
Christian Stadler, a professor of strategic management at Warwick Business School, said: “That the VW brand has been hit more than others is no surprise but, considering the furore of ‘dieselgate’, we have definitely not witnessed the demise of the Volkswagen Group that some expected.”
For its competitors, things look a little clearer. Some have questioned whether VW’s practises might be the industry norm, but for now no other manufacturer has been implicated.
Before the scandal, German auto manufacturers were popular issuers among investors and had no trouble securing financing in normal market conditions. In January 2015, VW had priced a 15 year bond at mid-swaps plus 60bp. The spread had widened in the following months as part of a broader market shift in sentiment. But once the details of the emissions scandal were public the spread ballooned to around 240bp.
In the early days of the scandal, this panic-widening proved contagious, with similar issuers such as Daimler seeing similar, if slightly less aggressive moves. But for issuers other than VW, the reaction was relatively short-lived and they had recovered their poise before the ECB announced in March it would include corporate bonds in its QE programme.
Daimler, for example, was among the first European corporates to the bond market in 2016, issuing a €1.25bn three-year floater at Euribor plus 53bp, a €1bn five-year fixed-rate at mid-swaps plus 65bp and a €1bn eight-year fixed at mid-swaps plus 77bp – all tighter than guidance.
In February, BMW sold a dual-tranche euro benchmark. A €500m floater was priced at Euribor plus 65bp, while a €750m fixed-rate tranche came at swaps plus 85bp. The deal was relatively small for this issuer – its last euro deal came in November at €1.25bn, and its last dual-trancher last September for an aggregate €1.5bn – but the price shows there was no sense of crisis around the issuer.
The ECB’s announcement saw spreads for auto manufacturers tighten further, along with other large credits. The move creates a buyer of last resort for the issuers and has clearly had a positive impact on spreads – even VW’s. On the eve of the ECB’s pronouncement, VW’s 15 year had come back to 180bp over mid-swaps, further narrowing to 145bp by April.
There was similar tightening on other German credits: Daimler issued a 10-year bond in March at swaps plus 105bp, which in April was trading at 53bp – a tightening of around 50bp in response to the ECB’s statement.
Yet the ECB has also drawn criticism that it could undermine secondary market liquidity. Some estimate the ECB could end up acquiring between 30% and 50% of new issuance, as well as some secondary market paper, which will then be held to maturity. Some issuers are also concerned that ECB purchases could be perceived as implying they needed government assistance and there has been talk of syndicate desks limiting allocations to the central bank, though this would probably result in greater acquisitions in the secondary market. Ultimately, only time will reveal the true impact on liquidity.
The year has also seen both Daimler and BMW adapt their longer term funding strategies. BMW has traditionally avoided the public US institutional market, preferring to rely on private placements. Its core market has always been in euros, supplemented with deals in sterling, Australian and Hong Kong dollars and some others. But this year it has been active in US dollars.
Daimler, on the other hand, has been a regular issuer in dollars. But this year it has been unusually active elsewhere, particularly in the euro market, where it had raised €6.75bn by April. It has also issued in sterling and renminbi.
Christoph Seibel, head of corporate DCM for Europe at RBC Capital Markets, said: “It is interesting that BMW and Daimler’s funding approaches had differed somewhat in recent years, with BMW relying heavily on the euro market and Daimler much more on US dollars. Yet in 2016 this changed, with BMW issuing US$4bn in 144A format for the first time, whereas Daimler has issued over €6.75bn so far this year while only issuing US$400m in Eurodollar format.”
Even the ECB effect has not been sufficient to entice VW back to the senior unsecured bond market, where it has been absent since the emissions scandal broke. This is testament to the flexibility of its balance sheet, which has allowed it to wait for a favourable opportunity. As well as a large cash balance, it has a €20bn credit facility with a consortium of banks, arranged in late 2015. And, of course, it has the ABS market.
Seibel said: “VW was really quick to adapt its financing strategy and secure alternative funding from other markets. From a treasury and funding perspective, it has been a very impressive performance that has allowed them to implement their financing strategy without the need to access the senior unsecured bond market since September 2015.”
Structured finance has always been an important source of funding for car manufacturers, partly because the short-term car loans they provide are ideal assets to use in the collateral pool for ABS. During the financial crisis, when the market was at its lowest ebb in terms of demand for securitised debt and most issuers balked at the price being offered for deals, auto issuers were among the few to maintain their presence.
The market has attracted a growing number of issuers. “Ten years ago, the German ABS market was dominated by VW. But, in recent years, there have been a greater number of issuers coming to market more often,” said Gordon Kerr, head of structured finance research for Europe at DBRS.
Yet VW remains dominant. In 2015 – a record year for German auto ABS – Moody’s rated €11.5bn in issuance, of which VW represented 73% and Daimler 10%. BMW did not issue ABS that year.
Auto ABS was not the target market for the ECB’s QE programme, which, in terms of securitisation, was aimed more at SMEs and RMBS. ABS has a committed investor base that remains hungry for floating-rate and short-dated paper, ensuring there has been no marked downturn in the number of issues. The last two years have seen a market that has long been popular in Germany gain prominence elsewhere too. In Germany itself, auto ABS has had a good start to 2016, putting it on a trajectory to achieve similar levels of issuance to recent years.
Kerr said: “Auto ABS specifically has made improvements over pre-crisis levels, unlike the rest of the market which remains well below those levels. But even auto ABS now looks to have plateaued, and expansion looks set to come from new issuers and new markets.”
One possible area of ABS growth is Green securitisations – pooling loans for electric or hybrid cars. Regulators may be keen to promote this, but much depends on what price is available, said Kerr.
One factor that may have contributed to this plateau has been the emergence of negative rates. Sebastien Schranz, analyst at Moody’s in Frankfurt, said: “Negative rates can be both positive and negative for ABS. Low interest rates on the securitised loans make it easier for borrowers to keep up repayments and keep defaults down. But negative interest rates can also create negative carry within the structure if the structure does not cater for negative interest rates in the swap and account bank agreements.”
Moodys research also shows that auto ABS is not as affected by this as other types of product, such as Spanish RMBS.
ABS has been at the heart of VW’s funding strategy this year. The link between the underlying securities and the originator is weaker in ABS than with corporate bonds, providing some insulation from negative market sentiment. ABS issuance is typically more correlated to macroeconomic factors such as employment, which drives car sales, rather than to the more issuer-specific factors driving bonds.
The impact of the emissions crisis also varies depending on the jurisdiction. VW has mitigated the impact by issuing opportunistically. In the UK, for example, there have been fewer deals from German manufacturers, though uncertainty around the eurozone referendum is likely also a factor. But VW has found opportunities elsewhere.
Volkswagen Financial Services priced its largest China ABS in January, achieving the lowest ever price for a Chinese auto ABS. The Rmb3bn (US$456m) Driver China Three transaction comprised a Rmb2.632bn Class A tranche at 3.30% and a Rmb157m Class B at 5.10%.
In January, it also placed the largest Spanish auto deal post-crisis tighter than most expected, pricing the €858m senior tranche of its Driver Espana Three at 105bp. Market expectations had suggested as wide as 135bp on the back of VW headline risk and broader market volatility. It was more expensive that its last Spanish ABS deal, which came at 53bp – days after the scandal broke and before the impact had been fully priced in – but the market was receptive.
It was a similar story in Australia in March. The issuer printed the third deal off its Driver Australia ABS programme, requiring a significantly higher margin than its deal a year previous. The Class A notes priced at one-month BBSW plus 170bp and the Class Bs at plus 265bp. This compares to 75bp and 135bp in February 2015.
Pricing was also initially wider than anything seen in comparable deals from competitors. By November, only months after the scandal surfaced, BMW was already placing €745.6m in senior notes at 38bp. But at least VW was able to secure financing.
Kerr said: “It is a very complex market and it is hard to judge how much of a problem the VW emissions scandal poses for future deals. For current deals, the scandal could affect the transaction only if the underlying loans were going to be cancelled, but there is no evidence that VW cars are unfit for use, so that does not look likely.”
The legal position of the loans relating to affected vehicles varies between jurisdictions. According to Fitch, VW has little liability to car-loan borrowers in France or Germany, but could be liable to claims in the UK if VW cars are judged to have been defective. Much will depend on whether it can deliver on its promise to resolve NOx emissions issues by the end of this year. If it does not, the damage to its reputation – and its relationship with investors – could be an even longer term casualty.
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