Volkswagen paid significant concessions to raise €5.15bn-equivalent in euros and sterling last week, triggering intense debate over whether the deal’s execution has decisively shifted pricing power to investors or whether the company was simply a victim of tricky circumstances.
The deal shook the European corporate market, coming under a week after the company had taken US$8bn out of the US dollar sector – its first issuance there since it was caught cheating on emissions tests in 2015.
Bankers from leads BNP Paribas, Deutsche Bank, Goldman Sachs, MUFG and RBC Capital Markets said the larger premiums were necessary to ensure VW could access the market in size. The six tranches on offer ranged from six years to 20 years.
Bankers involved also said the aggressive timing was required because VW was issuing at the parent level, which requires standalone documentation, and therefore had to be concentrated within a small issuance window.
Since the diesel scandal, VW has not had a shelf registration programme in place, meaning the €8bn to €10bn it used to issue via private placements now has to be allocated to one-off issues in the public debt markets, Jorg Boche, VW group treasurer, told IFR.
“We do hope to get back into a shelf registration and to be able to use that as of next year or 2020, but for the time being there is a certain lumpiness to issuance,” Boche said.
CHEAP AS CHIPS
Still, the speedy follow-up spooked investors, as did the generous levels, which forced them to re-mark their books not just on VW but on credits across several sectors, a syndicate banker away from the deal said.
“The deal had to be cheap – but it was fairly egregiously cheap,” the banker said.
He said the premiums affected execution – the deal was just twice covered – because investors did not understand why the company was coming back to the market so quickly and at such a discount to its outstanding bonds.
“Volkswagen pushed it too far,” a second syndicate banker away from the deal said. “It was a game-changer for the market, and investors will now ask for a bigger cushion for deals.”
A third banker away from the deal compared the market reaction to that seen after Sanofi’s €8bn bond in March.
Sanofi’s concessions, between 10bp and 20bp, repriced its curve, although those concessions now look relatively small.
Both VW’s US and euro deals were criticised in the market: the former for being too expensive, and the latter for being too cheap, Boche said.
“The truth is that it is quite difficult to price two deals at the same time when you have very different conditions,” he said.
“Banks had to find a solution to this conundrum: how do I price a deal in the US dollar market where we have been almost non-existent, versus the euro market where we’ve been a heavy issuer?”
“We hope, as we put the diesel crisis behind us, that we will be able to get back into a normal issuance pattern,” Boche said.
SEMINAL MOMENT
“VW was another seminal moment for the market,” said the third banker away from the deal. “The issuer capitulated and investors now feel that pricing power has shifted to them. It changes the market.”
Such approaches to pricing are becoming more frequent – and some would say necessary – in a volatile market.
In the last few weeks borrowers have had to navigate around headlines on oil prices, trade wars, Italy and Brexit.
“The year has been dominated by these kind of deals,” the banker said.
Atos (rated BBB+), for example, left nothing to chance in getting a €1.8bn bond issue away on October 31, offering up to 50bp at landing for its longest tranche, a €350m 10-year.
Last Thursday, Takeda offered premiums of up to 30bp to get its €5bn M&A deal across the line - a rough estimate as it was the company’s debut euro bond.
“These deals are eye-catching but they’re throwing spread at the challenge in front of them,” the third banker away from the deal said.
WALL OF MATURITIES
VW also had strategic objectives. The company has nearly €20bn of bonds maturing next year. A lead banker said it also wanted to term out debt and make a call on interest rates.
“It was unexpected timing but not unexpected volume,” he said.
During the diesel crisis, VW relied a lot on commercial paper, Boche said.
“That was great from a cost point of view but it meant the duration of liabilities came very short,” he said.
“With both the US and euro/sterling deals, we were looking to go into longer maturities to take duration out of the market and lengthen the duration of liabilities.”
The sheer quantity of issuance from VW across its entities in all major markets this year may also have affected demand.
VW has already tapped euros six times this year via various funding entities, according to IFR data.
But leads argued that while VW is a regular capital markets visitor, this deal carried rarity value from both the issuer perspective and the tenor.
The issuer was Volkswagen International Finance NV, which last came to the euro market in early 2017, according to Tradeweb data, while VW last issued a 20-year bond in 2013, IFR figures show.
HOW HIGH?
But that meant there was some disagreement over how high the premiums actually were.
VW usually issues from its bank, financial services or leasing groups – the units that fund the company’s short-duration auto loans.
Bonds issued from those entities are therefore shorter while the 3.3% 2033 issued in 2013 is reportedly illiquid.
“Building out VW’s curve in the long-end was a challenge,” the lead banker said.
Bookrunners used long-dated curve from credits such as AB InBev, AT&T and Verizon to extrapolate a pricing point.
Using that method, a second banker on the deal said he saw the NIPs more in the range of 30bp–50bp. And a third lead banker said the NIPs were not any higher than 40bp across tranches.
However, using the same comparables IFR calculated new issue premiums as more in the range of 75bp at the long end of the deal.
And CreditSights analysts put the NIP on the new 20-year as high as 80bp, based on VW’s curve.
Two leads pointed out that the bonds were trading 4bp–5bp tighter in the secondary market the following day.
“It was clearly priced appropriately,” a third lead banker said.
Investors placed €8.25bn in orders for the €4.25bn euro component and £1.5bn for the £800m sterling portion.
The company sold a €1.25bn six-year floater, and €750m nine-year, €1bn 12-year and €1.25bn 20-year fixed rate notes.
Launch levels on the fixed tranches were mid-swaps plus 185bp, 220bp and 270bp – all 10bp tighter than IPTs.
In sterling, VW launched a £350m eight-year at Gilts plus 220bp and a £450m 13-year at plus 260bp.
“Autos are clearly a difficult sector right now but VW decided to bite the bullet and price a deal,” one investor who bought the new bonds said.
“The ECB is winding down asset purchases, and VW wants to raise sterling ahead of Brexit. You can see why they came and they were willing to pay to get it done.”
