Volkswagen got a rapturous response for its long-awaited debut green bond on Wednesday, as investors put aside any qualms over the company's past performance with the deal more than five times subscribed.
While Daimler beat its rival to the punch by becoming the first German carmaker to issue a green bond through a transaction earlier this month, VW's €2bn dual-tranche deal was still an important milestone for the European corporate market given the company's history.
Earlier this year VW said that the emissions scandal of 2015 had cost it some €31bn in fines and settlements.
Yet any fears that investors are still mistrustful of the company can be cast aside. Just like Daimler, VW was able to price its green bonds inside fair value, though bankers say it's hard to pinpoint just how much the green label is responsible for that.
"The bond market is insanely hot at the moment," said a lead on the VW deal.
That aside, there were other technical reasons behind the deal's outcome.
Demand from investors with ESG mandates for green debt issued by car-related issuers is pretty strong as they offer attractive spreads and provide diversification, said one asset manager.
VW, rated A3/BBB+ (both negative), priced a €1.25bn eight-year tranche at 125bp over swaps and a €750m 12-year bond at plus 150bp.
In contrast, US confectioner Mondelez (A3/BBB) printed €500m six-year and €750m nine-year notes at plus 50bp and plus 70bp respectively on the same day. While the Mondelez bonds weren't green, the relative value point still stands.
Compared with its own curve, VW came about 15bp through fair value, with pricing on both tranches revised by up to 45bp as combined books hit €11.4bn.
LONG BUILD UP
The deal came six months after VW announced its Green Bond Framework with some bankers and investors wondering why it had taken the company so long to make its green debut.
"Clearly it was a non-deal roadshow, but still, there was an expectation of something sooner rather than later," said a banker away from the deal.
However, the spread of Covid-19 and the issuance of a US$4bn multi-tranche bond in May to shore up the company's liquidity meant that VW had little need to look for additional funding, said leads.
Proceeds raised from bonds issued under VW's framework will be used to finance or refinance projects related to the manufacturing of electric vehicles and dedicated e-charging stations.
"It's a very pure framework, only going towards electric vehicles. VW are massively investing in their electric vehicles platform, and this is an important transaction for them," said a second lead.
A second-party opinion of the framework has been given by Sustainalytics, which said that it is credible and impactful and aligned with the four core components of the ICMA Green Bond Principals and LMA Green Loan Principals.
"This green bond has been strategic to the company for quite some time and is part of positioning them away from what happened five years ago," said the first lead.
"Of course, we were incredibly conscious of what happened around emissions, but we were obsessive about making sure we did this right."
Since the US Environmental Protection Agency found that its diesel cars had software installed to defeat emissions tests, VW has put in a big effort to rebuild its reputation with investors.
Green is at the core of its corporate strategy.
Its Together 2025 strategy, for example, includes a strong commitment to electric vehicles. The company has targeted the production of one million electric cars, which it expects to reach by the end of 2023, two years earlier than previously predicted. VW expects 1.5 million electric cars to be produced by 2025.
BBVA, Commerzbank, HSBC, ING and Societe Generale were the leads on the deal.