Of all the sectors to suffer in a difficult 2000, the automotive sector probably suffered the most. All the car makers have seen their spreads widen considerably in the public market, driving up their cost of funding. And worryingly the Euro-MTN market, so often a safe haven for issuers finding the public markets too demanding, is offering little respite for these issuers. "The market is not closed to these issuers," says one Euro-MTN dealer. "The fact that no one is really issuing in the private market is a result of the borrowers posting levels that are way out of line with what they are issuing in the public market. The Libor-based funds, which typically buy automotive deals, would happily buy their paper all day at the right spread in the private market." Last week GMAC was offering over Libor+70 bps in the public market, but only willing to post Libor+30 bps in the private market. Not surprisingly it is ignoring the private Euro-MTN market and funding itself via the public Eurobond and US market. The problems of DaimlerChrysler, Ford and General Motors started in the second half of last year and are well documented. More than four years of consecutive quarterly earnings growth ended for Ford in October after it was badly hit by the Firestone tyre recall. Chrysler lost $1.25 billion in the fourth quarter. And General Motors announced in December that it would cut 10,000 jobs in North America and Europe to face increasing competition in the industry. As Anthony Everill, Merrill Lynch's head of Euro-MTNs, said when reviewing 2000: "Telecoms have been banner headlines for the whole year. It's not like they just snuck up on us. But the auto sector has had a more pronounced effect. The spread widening in that market has impacted the whole market." But though spreads widened in the fourth quarter of 2000, it was not until this week that the market has seen the levels at historically wide levels. The 10-year tranche of DaimlerChrysler's US bond launched this week is trading at 275 bps over treasuries. And though many dealers applaud some of the car makers' phlegmatic attitude, which is seeing them pay up and shut up, not everybody is happy. Albrecht Moehle, head of capital markets, Volkswagen Group, says: "The troubles of the big three have destroyed our margins. The difference for Volkswagen is that we do not need the money. The big players often come to the market but we will not pay 77 bps for a three-year floater. Nevertheless we are happy with our deals in 2000 but there is no doubt that in our industry it is getting more difficult to achieve our levels." But many dealers claim Volkswagen has a short memory and that it has often had to trade at these levels in the last five years. And it is naive to complain that investors judge all automotives as a homogeneous sector. Ford, when challenged with the accusation that it is dragging the whole sector's spreads wider, is keen to stress that it believes European investors to be just as credit-aware and sophisticated as their US counterparts. However Bill Kryska, funding analyst at Ford, says: "Is it unfair? Yeah, it's unfair. But investors have their own reasons for treating sectors as they do. You can't fight that." But most car makers managed to raise all the funds they needed for 2000 despite their difficulties. Some, like Fiat, had luck on their side. "Obviously spreads in the market are a lot more extensive than they used to be. We did a big five-year euro500 million ($468.78 million) trade in August and a big three-year euro750 million note in October, just before the troubles, and in hindsight this proved to be a very wise move," says Saverio Cacopardo, head of capital markets at Fiat. Other issuers were forced to shop around a little more. Ford was grateful for this opportunity. "Off our Euro-MTN programme we had to be a little more opportunistic. We had to pay special attention to tapping pockets of demand that we might not have tapped before," says Ford's Kryska. As a result it did a Nkr1 billion ($107.88 million) two-year deal in November. He continues: "It was a retail deal, which is another positive aspect to it. Retail investors tend to be more buy-and-hold than institutional investors." There were pockets of demand to be found, but the private market proved to be a less fruitful area of issuance. Despite the bad patch, car makers issued $39.97 billion off their MTN programmes in 2000 - significantly more than in 1999. However most of this debt was in the form of large public transactions. And 2000 saw a drop in private issuance. In 1999 50% of trades done off MTN programmes by autos were private, compared to 32% in 2000. But issuers looking to the future are realistic. "We always tend to follow investor demand. In the private market we do what the market requires," says Fiat's Cacopardo. But most issuers know that investors, in times of trouble, seek the liquidity that large public deals offer. Many dealers are not too worried about the the auto sector, however. The market is becoming increasingly confident at handling event risk. As the Euro-MTN market becomes ever more credit-oriented, dealers know that it has become a regular fixture. German Landesbanks and the Californian utility sector are being watched closely as the next hot spots. As one dealer says: "The market's not seeing meltdown. The Fed is cutting rates not because of credit events in our market, unlike back in the early 90s, but because of the US domestic economy and the equity markets."
January 12, 2001
