By Sarka Halas
Volkswagen International Finance, the financing arm of German automaker Volkswagen AG (VOW.XE), has opened the 2013 bond market for European corporate borrowers, taking advantage of low financing rates available for European companies.
Volkswagen priced its new 1 billion euro ($1.3 billion) 2020 bond at 78 basis points over the reference midswaps rate. The company offered a very low yield of just 2%.
Volkswagen, a core European corporate credit, was able to tighten pricing from 85 basis points to 78 basis points over the midswaps rate it initially offered on the back of strong investor demand for higher yielding corporate debt amid the low rates environment. Demand for the bond was just under EUR2 billion.
The company's 2022 bond is currently trading at 80 basis points over the reference midswaps rate so the tighter pricing was no surprise to market watchers.
"They are offering very limited yield, there is room for very little performance in the long-term," said Jeroen van den Broek, credit strategist at ING.
Demand, however, has to come from somewhere. "It's the beginning of the year and investors have a lot of money to put to work, Volkswagen looks attractive to investors, operationally it looks close to BMW AG (BMW.XE), but it trades at a reasonable premium to BMW," said Max Castle, vice-president, developed markets credit research at ING.
Despite the EUR2 billion in demand, not everyone who looked at Volkswagen's debt was enticed enough to buy it. Tom Ross, fund manager at Henderson Global Investors, said the company didn't look like good value.
Mr. Castle said Volkswagen has an ambitious investment plan and will invest $50 billion between 2013 and 2015. "They have set a goal to become the world's largest car manufacturer by 2018, so they are expected to issue a lot over the next couple of years to fund their expansion in China and other emerging markets," he said.
However, compared to other auto companies, Volkswagen still has to pay up to attract investors. The company is closer to the triple-B landscape than BMW AG, for example. Volkswagen is rated A3 by Moody's and A- by Standard & Poor's, while BMW is rated one notch higher at A2 and A by the same ratings companies, respectively. In comparison, BMW's similarly dated debt six-year bonds are currently trading at 62.5 basis points over the reference midswaps rate.
Borrowing costs for European companies have hit historical lows as investors switch out of safe but low-yielding government bonds into high-quality corporate paper that offers better returns. Companies from the euro zone's strongest economies have been benefiting most as investors seek refuge from the sovereign debt woes plaguing the region.
Last year, Volkswagen issued at total of 16 euro- and dollar-denominated bonds, for a total amount of EUR17 billion, according to Dealogic data. Volkswagen was last in the market back in August, when it sold a rare 10-year debt at a very low 2.375%.
However, last year bond issuance from the European auto sector was higher than redemptions, and according to Mr. van den Broek there was a significant amount of financing ahead of 2013. The auto sector needs to finance about EUR35 billion of investment in 2013, compared to EUR46 billion last year.
"There are very heavy redemptions due in January and February--about EUR30 billion for the corporate sector and EUR6 billion of that in the auto sector--so there will a significant amount that will come back to investors and they need to reinvest," said Mr. van den Broek.
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