| Porsche: everyone wants a piece of the action | ||||||
Dresdner Kleinwort Wasserstein is quite pleased with the quality of the auto deals it has done to date this year, so much so that it is thinking of raising the stakes when it comes to issuer freebies. BMW gave the syndicate team nice paper flags sporting its famous logo before its January issue; Volkswagen pushed the boat out and provided company mugs. The debt team is now hoping for great things when Porsche comes to market – perhaps a scale model of the soon to be released Carrera GT at least.
The BMW deal, the first corporate issue of the year, set a positive tone for the auto sector. Dresdner closed its own book on BMW’s e750 million ($670 million) seven-year deal in one-and-a-half hours. It was also three times oversubscribed, with most of the 70 orders coming from Germany but a fair number from UK, Swiss and Italian investors, with even a showing from Asia.
This meant the deal as a whole could be priced below expectations of 30 basis points over mid-swaps. “At 29 basis points over mid-swaps, this was well inside what we were aiming for with no new-issue premium,” says Ian Platt, managing director, deputy global head of syndicate at Dresdner.
It was bookrunner on the deal along with Barclays Capital and Salomon Smith Barney. The issue also tightened after launch and was trading at 27 basis points over swaps at time of going to press.
“The timing was very good as the sweet spot in the maturity curve was at seven years, exactly where BMW wanted to fix the deal,” says Platt. “If you look at what’s out there in the auto sector, there is very little long-dated paper and investors are looking to extend down the maturity curve.”
In fact, credits such as BMW and Porsche are bound to go with a swing. Both are great names with strong retail demand that can almost be seen as quality goods manufacturers rather than auto makers.
They are also impeccably strong credits that rarely come to market – BMW is rated A1 by Moody’s, only has one issue outstanding and has said its January issue will be its only benchmark deal this year. Porsche is not rated but has an implied rating of high single-A and will be refinancing debt from its last issue in 1997 when it does come to the market.
However, Volkswagen, also rated A1, was not so lucky with its e1 billion three-year and e1 billion 10-year issue priced just a week later than BMW and also led by Dresdner along with Deutsche Bank and Salomon Smith Barney. The issue was priced three basis points wider than expected on both tranches, having come to market at a time when Ford was in trouble with the rating agencies and all auto company spreads widened significantly as a result. VW, although sharing a rating with elite issuers such as BMW, is seen as a mass-market company and therefore was more vulnerable.
“When Ford was put on negative outlook by the rating agencies it was an unfortunate time as we had VW out there,” says Platt. “Ford’s spreads widened 10 to 15bp and then all auto spreads softened.”
Nevertheless, spreads throughout the sector have already tightened significantly since then, as auto issuance looks set to become a lot scarcer. Although GMAC and DaimlerChrysler have already tucked multi-billion vanilla issues under their belts this year, total issuance levels from the big three auto companies are already down.
They are expected to stay that way since the refinancing of their commercial paper programmes in the term markets has been done, they are all due to receive cash from significant asset sales this year and they are working hard at bolstering working capital. As a result, Paul Griffith, director, fixed income at Goldman Sachs, predicts that the $75 billion of euro and dollar debt issuance done by the big three in the term-debt market last year will drop to around e55 million to e60 million this year.
“Even from the auto companies that have already done deals this year, volumes are much lighter than in 2001, which is one of the reasons we’ve seen spreads tighten so dramatically this week,” says Platt. “GMAC did a five-year and 10-year $2 billion deal and did not pay a new-issue premium for their deal, which just goes to illustrate the demand.”
Although the big three are going to have to do benchmark issues in each currency this year, which may put a bit of temporary pressure on the market, auto bond spreads are likely to continue to come in this year across the board.
That’s good news for an industry that is likely to face even more bad news and cut-throat competition than it did last year. “Our euro auto index averaged Libor+93 over the course of last year. At the moment it is Libor+107 and despite a lower average rating, we expect our autos index to trend back towards that Libor+93 level mainly due to strong technicals,” says Griffith.
But even if supply is scarce, the outlook is not all rosy for European credits, Griffith believes that Renault and Fiat will face the most rating pressure and therefore pricing pressure. “Fiat’s new launch doesn’t look as if it is going to resurrect auto earnings and Renault is not launching the new Mégane or Scenic until the end of 2002 or early 2003,” he says. “Both Renault and Fiat have relatively high levels of debt versus their peers, so it’s going to be a very difficult deleveraging story for both of them.”
Griffith thinks the situation is particularly dire at Fiat, which was put on negative outlook by Moody’s in January, although the company has already leveraged up with a preferred and convertible issue at the end of last year. “If Fiat does come to the market,” he says, “it is going to be at significantly wider spreads than anyone else. It is very intensively focused on asset sales right now, but if it is not able to sell assets, this could definitely have a ratings and liquidity impact on the company.”
With a severely diminished pipeline looking increasingly likely this year, the only bright hope for banks looking to bag lucrative mandates will be if companies do opportunistic financing for 2003 towards the end of the year or if 0% finance deals take off more than they did last year and companies need to fill a funding gap. Manfred Schepers, global head of debt capital markets at UBS Warburg, says: “I think a lot of debt in the auto sector this year will actually depend on new credit growth – more financing of discounted financing offers for cars.”
If neither of these possibilities materializes, bankers had better make the best of things while they can. At press time, Dresdner Kleinwort Wasserstein had just launched Ford’s first straight debt deal of the year, a e5 billion three-year benchmark global, along with BNP Paribas and UBS Warburg. Bankers had better collect as many matchbox trophies of their dream cars as they can now.
