The Debt Market's $200 Billion Gorilla Wakes Up
(Bloomberg Opinion) -- Joerg Boche is arguably the most important person in Europe’s corporate debt market right now (with apologies to Mario Draghi). As the group head of treasury at Volkswagen AG, his decisions on the company’s funding are critical not just to the German autos giant but to European corporate credit spreads as a whole. VW had to rein in its bond issues after the Dieselgate scandal, but this year it’s been back with a vengeance. As with General Electric Co in the U.S., where this 800-pound gorilla goes so does Europe.
With 82 billion euros ($93.6 billion) of bonds to manage, and about 175 billion euros ($200 billion) of total debt, Boche’s role would be challenging at the best of times. But his company’s head of compliance has warned that 2019 will be VW’s “most difficult year ever.” That takes things to another level.
Boche, a former investment banker with Goldman Sachs Group Inc and Dresdner Bank – whose friendly and approachable demeanor isn’t entirely typical in VW’s upper ranks – took over the Treasury role a decade ago. It’s been some ride. He certainly had his work cut out after the emissions scandal emerged in September 2015. From being one of the most prolific bond issuers in Europe, VW was forced to switch its issuance needs into short-term commercial paper as bond market access became more difficult.
That all changed in 2018. Boche made a big statement in November by undertaking a 13 billion euro-equivalent four-currency funding swoop. It was the second-biggest offering in the euro market this year, helping him raise five times as much in euros this year as the year before. Not before time.
It came at a cost, however. By offering premiums of 55 basis points on average to entice investors, VW pushed its existing debt yields wider – and much of investment-grade euro corporate debt with it. That’s going to hamper future funding. VW credit spreads against German government debt are about 100 basis points wider now than at the start of 2018.
With 12 billion euros of VW debt maturing in 2019, it’s going to be harder for Boche to keep all the financing plates spinning now that those euro credit spreads are on the rise. It doesn’t help that the European Central Bank’s corporate purchasing program is stopping. VW has benefited hugely from that scheme, with more than 15 of its bonds held by the ECB. VW’s recent euro issues were timed ahead of the deadline.
Boche plans to move when the opportunity arises next year, something that will require particular deftness given that he expects a global cyclical downturn and raised leverage to push credit spreads steadily wider anyway. He has proved VW is back as a major bond issuer, in dollars as well as euros. VW’s hybrid subordinated debt offers a cheap, non-dilutive way to firm up the capital base.
It certainly needs the money. Dieselgate has resulted in $28 billion of penalties and counting, and litigation is ramping up in Europe. Just as challenging for Boche is financing VW’s needs at a time of huge change in its industry because of electric cars, autonomous driving, ride-sharing and the rise of China. The company needs some major alliances or big acquisitions, and that has to be paid for. It could spin off some of its prize assets, but has so far proved reluctant.
Boche has helped Europe’s debt market gorilla weather the dieselgate storm. This year will be his true test.
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Marcus Ashworth is a Bloomberg Opinion 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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