Volvo's defensive trade on Monday gained size but only after leaving a hefty new issue premium on the table, underlining the weak market sentiment after a hawkish surprise at central bank meetings late last week.
Volvo Treasury launched a €500m three-year senior unsecured bond at mid-swaps plus 37bp, after looking to raise €400m–€500m when it set initial price thoughts at 50bp–55bp.
Syndicate bankers put fair value for the new trade at a benchmark spread of 20bp, noting that where the first trade of the week landed would offer a data point to assess what market conditions look like after the European Central Bank and Bank of England meetings on Thursday.
"We're watching, but investors are also watching to see where that new balance point is – where investors are thinking it's interesting enough to chase the market," said one syndicate banker ahead of pricing.
"This transaction will get done and a spread at the 30bp level would be brilliant. But a 15bp–20bp concession? I would take that as a bearish sign."
Comparables included the company's 0% May 2024s, 0.125% September 2024s and 1.625% May 2025s, which were bid at 23bp, 18bp and 23bp, respectively, prior to the deal announcement.
Books were above €1.4bn when guidance was set at 40bp area via BNP Paribas, Bank of America and SEB. Final books were at over €1.25bn.
"It's a very cautious trade that fits what the market wants. But it's also exactly what the issuer wants, as they are backing up loans. It's going to work," said another syndicate official before the new transaction was launched.
"Where do they get to at final pricing, maybe at 30bp–35bp? But the deal could get stuck a little bit wider. We're watching any piece of information (to see where the market is), but overall we're almost there for a good entry point taking the moves in rates and adding new issue premiums."
One portfolio manager at TwentyFour Asset Management wrote that credit spreads have already widened a reasonable amount, "especially given the solid fundamental backdrop", although the spread widening could and probably does have a little further to run.
"Timing is always important when trying to buy dips, and this dip is the most meaningful one we have seen since March 2020," said portfolio manager George Curtis.
"Record low default rates in Europe and the US continue to look supportive for credit, and they are forecast to remain well below long-term averages for 2022 and 2023. Additionally, we expect the current positive ratings migration to continue at a historically rapid pace, economic growth is well above trend and the banking sector, in our view, is as strong as it has ever been."
ECB president Christine Lagarde opened the door to the bank's first rate hike in more than a decade, while the BoE said it plans to sell its £20bn corporate bond holdings down to zero by the end of 2023.
Auto sector supply
Volvo's new issue, which is guaranteed by parent AB Volvo (A2/A–, Moody’s/S&P), is the company's first offering in a year that has seen just a handful of bonds from the auto sector, including from RCI Banque, Toyota Finance Australia and Volkswagen.
Euro high-grade supply from the sector comes in at around €4.5bn so far this year, including Volvo's trade, according to IFR data. That is much lower compared to the average in the previous four years during the same period, at €7.3bn.
"I think [auto companies] are not selling as many cars because deliveries were slower due to supply chain issues, and lower delivery means lower borrowing," said the second syndicate banker.
While Volvo has also been prone to the production disruption from semiconductor shortages, with short-term production stoppages for the past three straight quarters, the Swedish manufacturer managed to continue to post industry-leading margins through the post-pandemic recovery by implementing cost-cutting measures, according to CreditSights.
In the pipeline for euros, Swedish heat transfer products supplier Alfa Laval (BBB+, S&P) is preparing to print a dual-trancher consisting of four-year and seven-year notes, with the overall issue size capped at €600m. Associated British Foods (A, S&P) is planning to bring a long 12-year note in sterling.