Following rumours it was eyeing the market to finance its €6.7bn purchase of the parts of Scania it does not already own, the A3/A- rated German company opened books on perpetual non-call seven and non-call 12-year tranches, setting initial price thoughts at 3.875% area and 4.875%-5%, respectively, equating to mid-swaps plus 255bp area and 285bp-297.5bp.
Despite almost €25bn of euro corporate hybrids having priced in 2013 - the busiest year on record - it remains relatively rare for a company to issue hybrid paper with the express aim of financing M&A activity.
Investors, though, proved receptive to the idea, with many saying they were happy with the rationale and calling the product a sensible fit for Volkswagen’s debt profile.
“We would be comfortable with the structurally subordinated position in VW’s capital structure given the company’s strong underlying credit quality,” CreditSights analyst Brian Studioso wrote in a note.
“We view the spread pick-up versus existing unsecured bonds as attractive and therefore recommend buying the hybrids.”
Buoyed by such opinions, books broke €5.5bn less than two hours into marketing, when leads announced official guidance in line with initial price thoughts on the non-call sevens and at 4.75%-4.875% on the non-call 12s.
Later, lead managers Barclays, Goldman Sachs, HSBC and Societe Generale fixed the final levels at 3.875% and 4.75% and finalised the deal sizes at €1.25bn and €1.75bn.
Size matters?
Brushing off comments that the lack of movement on the shorter tranche may have been a sign of weaker-than-expected demand, leads said they decided not to tighten in order to score size.
“The initial pricing thoughts gave the borrower options with regards to both size and price,” said Oliver Sedgwick, head of EMEA IG syndicate at Goldman Sachs.
Thanks to what some observers called a conservative execution on the shorter tranche, Volkswagen thus managed to price the largest ever two-tranche euro hybrid deal from a corporate issuer.
Last year, EDF printed a €2.5bn two-tranche deal and several corporates have since printed €2bn bonds, but none has broken the €3bn mark.
The marketing process may have lacked the hefty guidance revisions typical of new corporate deals, but observers emphasised that the funding levels Volkswagen achieved were still attractive on a relative basis.
Volkswagen’s other two hybrids, printed as non-call fives and 10s late last summer, priced with coupons of 3.875% and 5.125% and were bid at yields of 2.96% and 3.95% - or mid-swaps plus 211bp and 230bp - on Monday.
Monday’s non-call sevens priced equivalent to mid-swaps plus 255bp and the non-call 12s at mid-swaps plus 273bp.
Based on Volkswagen’s senior curve, they therefore offered subordination premiums of 205bp and 209bp, substantially slimmer than the 240bp-260bp on the previous hybrid outings.
The better Germany
Volkswagen’s hybrids printed less than a week after EnBW sold a 2076 NC7 deal, with many observers saying the automaker’s offering was the more compelling buy.
Some fund managers looking at EnBW were put off by the underlying issues facing the German utilities sector.
EnBW’s growth – like that of many of its country peers – has been stifled by a German nuclear U-turn and an array of competition pressures resulting from the government’s renewable energy subsidies.
“Volkswagen, meanwhile, has a solid ratings story and a very clear rationale for doing hybrid bonds,” one London-based investor said.
He also pointed to the performance of its existing hybrids - both of which have traded consistently higher since printing.
The new deals both broke tighter and were bid between half and a point higher in the secondary market by Tuesday.
As has become standard with the product, both tranches will be subject to a 25bp coupon step-up, in 2024 and 2026, respectively, and a further 75bp step-up in 2041 and 2046. The bonds are expected to be rated Baa2/BBB.
On the non-call seven-year, the UK took 40%, Germany and Austria 15%, Benelux 13%, Switzerland 10%, France 10%, Iberia 3% and others the remaining 9%. Asset managers took 66%, banks 15%, private banks 7%, hedge funds 6% and pension and insurance funds 6%.
On the non-call 12, the UK took 45%, Germany and Austria 17%, France also 17%, Benelux 8%, Switzerland 5%, Italy 4% and others 4%. Asset managers took 70%, pension and insurance funds 15%, banks 8%, private banks 4%, and hedge funds 3%.
