VW brings back hybrid supply

3 min read
Jihye Hwang

Volkswagen launched the first hybrid bond in the euro investment-grade corporate bond market since Russia's invasion of Ukraine on Monday in a sign that primary markets are almost back to full speed.

While supply across bond sectors has returned over the past few weeks, it has been mostly in safe areas, such as SSA or covered bonds though Deutsche Bank brought a more than four times covered Tier 2 last week. There has been some corporate issuance too but the sight of the first hybrid in more than a month will be a source of great encouragement to bankers and investors.

"There is a sense of the market having fully reopened," said a banker away from the deal.

The German automobile manufacturer, rated A3/BBB+, raised €2.25bn from a two-tranche transaction that was covered more than four times, with orders skewed to the shorter-dated hybrid. The deal paid a final concession of around 25bp across both portions, according to bankers.

Volkswagen's €1bn perpetual non-call 5.75 note and a €1.25bn perpetual non-call nine bond were launched at 3.75% and 4.375%, respectively, inside initial price thoughts of 4.25% area and 4.875% area. Barclays, MUFG, Natwest Markets Santander and UniCredit were joint bookrunners.

At the start, the banker away said the bonds were coming 75bp back of fair value, at spreads of 250bp–255bp and 275bp–280bp over the issuer's senior curve.

The deal is the first corporate hybrid since Deutsche Boerse raised €500m from a 26.25-year non-call 6.25 bond on February 16. That was before Russia's invasion of Ukraine on February 24.

Still, the 2022 hybrid roaster has been poor with only four such deals coming the euro high-grade corporate market this year before VW's. The asset class has struggled to perform because of the heightened market volatility stemming not just from the war but also the rising interest rates environment.

Two hybrid notes, perpetual non-call 5.25 and perpetual non-call 15, sold by TotalEnergies in January, for example, were bid at around 95 and 91 on Monday after pricing at par.

"It's clear that the market [has] stabilised and the spreads in the secondary [have] retraced. Although NIPs [have] varied and were higher last week, deals got done so there has been a positive momentum," said a portfolio manager.

The euro non-financials subordinated average spreads widened sharply in late February to peak at 296.8bp on March 7 having started the year at 173.8bp, but has since tightened back to 247.7bp as of last Friday, according to iBoxx.

Still, investors are wary of being too optimistic in their market outlook, and are balancing their need to generate alpha with a sense of caution.

"We are comfortable to hold short-dated hybrids and high-yield bonds or short-dated lower quality bonds with higher beta exposure because near-term fundamentals look strong, but it's very dependent on the tone of the market," the portfolio manager said.

Book sizes for Volkswagen's perpetual non-call 5.75 and perpetual non-call nine notes came in at €5.5bn and €4.75bn, respectively.

The subordinated notes have expected ratings of Baa2/BBB– and are issued through Dutch financing entity Volkswagen International Finance.