Leading from the front
Volkswagen demonstrated demand for the challenged corporate hybrid bond market following Russia’s invasion of Ukraine in late February, when it priced the largest subordinated offering of the year just a few weeks later, laying the groundwork for other issuers to follow suit.
The €2.25bn dual-tranche transaction on March 21 was the first hybrid bond in the euro investment-grade corporate market following the onset of the war on February 24.
While most supply in the immediate aftermath of the war came from safe sectors, such as SSA or covered bonds, the deal from one of the riskiest strata of the market highlighted VW’s status as a bellwether corporate issuer. The trade was followed by lower-rated hybrid issues the following day from Bayer and Telia.
In order to navigate market risk, leads Barclays, MUFG, Natwest, Santander and UniCredit strategically went out with large starting concessions of 75bp, which was one of the biggest premiums seen on a hybrid trade during the first quarter. While wide concessions became the norm in 2022, at the time of the VW deal many issuers still had a bull market mindset.
But the decision worked well as the deal achieved a combined order book of more than €8bn, even as frequent regional issuers, such as Nestle and Vonovia were tapping the euro senior market on the same day.
The strong level of demand also came on the back of the German automobile manufacturer's nimble approach in accessing the market. VW seized the first available window following its annual results on March 15, and as the VIX was receding from its early March peaks.
Leads eventually managed to tighten pricing by 50bp from initial price thoughts to launch a €1bn perpetual non-call 5.75 note at 3.75% and a €1.25bn perpetual non-call nine bond at 4.375%. Both tranches paid new issue concessions of about 25bp.
Despite a trend of hybrid issuers scrambling to lower or even retire their subordinated debt stack in the face of eye-watering refinancing costs, Volkswagen was able to achieve size to reaffirm its commitment to the asset class. The company had €1.1bn and €1.5bn of outstanding hybrids with respective call dates in March and December 2022. Both have been redeemed.
Volkswagen's two-part trade was the only subordinated offering of the year that raised over €2bn, according to IFR data.
The subordinated notes had expected ratings of Baa2/BBB– and were issued through Dutch financing entity Volkswagen International Finance.
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