Issuer: Porsche International Financing plc
Amount: Dm200 million
Launched: April 23 1997
Lead manager: Deutsche Morgan Grenfell
"It was our idea," says Porsche's finance director Holger P Härter. Any finance chief would say the same about his company's bond issue, but in this case it must be true. No banker would have come up with this scheme to sell bonds as status symbols.
This inaugural bond issue from the German luxury car maker was marketed as the latest accessory for the bondholder who has everything. "If you can't have a Porsche in the garage, at least you can buy the bond," says Manfred Ludwig, head of syndicate at Merrill Lynch in Frankfurt, summing up the syndicate's simple sales pitch.
A more original collector's item than model cars, Porsche bonds immediately acquired their own sentimental value. Three times oversubscribed, the issue was allocated in small tickets to reach as many retail investors as possible. Syndicate banks say many bondholders plan to frame the certificates and hang them on their office walls and may never redeem them.
This was the first part of Porsche's scheme to establish its name as a borrower. The plan was simple and daring: the Dm 200 million ($118 million) five-year bond was sold entirely on name, without rating, roadshows or investor meetings.
Härter's marketing strategy consisted of a gentle press briefing at Porsche headquarters in Stuttgart and a commission to produce particularly attractive printed bonds: the bonds and the five coupons carry stylish pictures of Porsche model each in a different colours.
After waiting six months for the right market environment, Harter decided to launch the bond at a spread of 14 basis points over its benchmark, the 8% German Unity Bond of 2002. With some misgivings banks accepted this pricing - it was extraordinarily aggressive for a new issuer that would probably earn no more than a single A rating from Moody's or Standard & Poor's.
Porsche managed to capitalize on the "triple-A" image of its cars, and syndicate bankers say any official credit rating could only tarnish that image. Fortunately for Porsche, the outstanding volume of its debt is far too small for Moody's Investors Service to consider awarding an unsolicited rating at present.
Banks in the small syndicate - Deutsche Morgan Grenfell was the lead manager and sold about three-quarters of the entire volume - were personally appointed by Härter, who selected them on price after a competitive bidding contest. "We favoured the banks which demonstrated they were the most aggressive in the market," he says.
The banks' brief was to sell direct to retail investors throughout Europe. Although there was no ceiling set for institutional investors, syndicate banks were not encouraged to sell to them. In the event, only about 15% of the issue was allocated to institutions, according to DMG.
Initially the issuer's bravado was vindicated by enormous demand from retail investors who didn't seem to care about the high price. "We reached far more retail investors than we thought we would," Härter says.
And once the issue was free to trade the spread quickly tightened to 1bp over, with continued demand from investors whose orders weren't satisfied. That effect didn't last: over the next four weeks the Porsche issue traded back up to the launch price.
Although the secondary-market price has not settled any lower than at launch, the issue's initial pricing and the demand it encountered were far better than Porsche could have expected. Creating bonds with sex appeal and novelty value is an ingenious trick. Once duplicated, however, the bonds could lose their rarity value. Porsche must now ask whether the trick can be repeated and if so, how.
Syndicate banks point out that the Porsche issue was launched in a favourable market - the company's share price had been doing well and earnings figures for 1996 were good. This was also a comparatively small issue; the same pricing could not have been achieved on a Dm500 million issue.
Nevertheless, bankers believe that the issue must remain unique. They suggest that the current investors will not accept more than one tightly priced Porsche issue at a time. So if Porsche returns to the market within five years - and Härter has already indicated it might - the company will have to find new investor groups, and probably try other currencies, too.
Even so, banks believe that retail demand will always be strong enough to support such relatively small issues. Porsche should be able to keep clear of institutional investors, which would undoubtedly ask tough questions and demand more realistic pricing. On the other hand, Porsche must eventually establish a name with institutions too if it wants to have free access to the capital market.
For the time being, that dilemma can be left unresolved. Porsche still hasn't decided how much it will need to borrow in future. At the launch of this first issue, Härter managed to avoid saying anything specific beyond an intention to invest the proceeds in "expansion".
Before the five years are up, Porsche may have to borrow much more substantial sums. Later this year its management will decide whether to proceed with plans to manufacture a Range Rover-style car, known in the motor trade as a sport utility vehicle. They believe demand for such a vehicle exists - particularly among wealthy Americans who already have a sports car and a limousine in the garage. But Porsche's business planners are still working out whether the scheme is a viable business proposition. They should not assume that the cost of borrowing will always be as low as it was this spring.