A Nasty Pileup in German Carmaker Daimler BMW Volkswagen Bonds
(Bloomberg Gadfly) -- Europe's new issue market is missing its Easter Bunny.
The big three German car makers normally come to the bond market in the lead up to the holiday, but so far they've been conspicuous by their absence. They will surely come soon, perhaps once the break has ended. When they do, they might want to think longer term about their financial future.
One of the main points of ultra-low European rates is that they help companies lock in super-cheap long-term funding and avoid an excessive weight of near-term liabilities while reducing their reliance on money markets and bank lending. A look at the distribution of bond maturities for Volkswagen AG, Bayerische Motoren Werke AG and Daimler AG shows that this wheeze seems utterly to have passed them by.
The weighted average maturities of their existing debt profiles are surprising short, especially when compared to the nine-year average for German government debt. This raises the question of whether their financial officers have been asleep at the wheel.
True, March so far hasn't necessarily been an ideal month. Heavy supply has given investors plenty of choice, and this has driven credit spreads up from record lows while widening the premium on offer for new issues. There's some indigestion in the market, as three-quarters of the 130 deals in March so far have widened since launch.
But the car companies should resist the temptation of being overly picky on timing. A 20 basis-point drop in ten-year German government bond yields since mid-February is a windfall that mitigates wider credit spreads. The automakers should take advantage. And given their delay in locking in low rates, they should issue much larger amounts of long-dated bonds than they otherwise would. Their bonds are much wider than the broader market, suggesting investors are already expecting a sweetener to get their issuance away.
Their euro-denominated issuance in recent months hasn't been enough to make a material dent in their unhealthy debt distribution. For instance, in January BMW sold 2 billion-euros of debt split between 5.5- and 10-year maturities, while Daimler issued a 750 million euro five-year note. This is pocket change compared to the vast size of their upcoming redemptions.
True, as some of the biggest issuers in Europe, these companies have a wider range of options. Any of them can securitize their auto loans, and Volkswagen has the additional luxury of an established perpetual bond market.
But these are meant to be in addition to a healthy collection of corporate bonds, not instead of. The three companies seem complacent that they can issue at will at reasonable rates. Not to mention that negative rates won't last forever -- the European Central Bank is reducing stimulus and debating the prospect of rate hikes early next year.
As cities turn away from diesel and the shift towards electric vehicles continues, the big three German makers really need to make sure they don't leave their financing to chance.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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