A motoring magazine once described the Volvo V70 as "a comfortable brick." It was a compliment. Volvo's Euro-MTN programme may not have the popular appeal of the estate car, but the team at the heart of the facility is just as robust, and they are creating far more money for the company. Volvo has raised $1.24 billion off 29 trades in the period January 1 to August 15 2001, up from $802.69 million off eight trades in the same period last year. It used two currencies in the whole of 2000, yen and euro, but this year has already expanded into the Czech koruna, Swedish krona and US dollar markets too. And unlike some of its competitors who, in the lean times of credit downgrades rigidly refuse to pay over a certain amount, Volvo has been praised by its dealers for being flexible and accommodating. Spreads in the automotive industry have ballooned since the credit migration (see MTNWeek, issue 213), and Volvo's have been no exception. But Volvo's capital markets team has maintained a good balance between taking a firm grip on its pricing and complying with investor demands. Thomas Lestin, senior dealer at Volvo Treasury, says: "The MTN programme is a very good funding tool as it is a mix of a lot of different instruments, and we have been using it opportunistically to find the right levels. I think Volvo has had a much nicer journey through the recent rough patches than some other issuers in the sector." JPMorgan is a dealer on Volvo's $4 billion Euro-MTN programme, which was signed in November 1994, and has placed eight trades for the issuer this year. This is more than double any other house. Robert Nankivell, managing director at the bank, says: "We think Volvo's pricing is pretty fair. Some issuers prefer a bond that meets their own criteria rather than satisfying the investor's requirements. But Volvo, and most issuers in Europe, being swap literate, realize that just because a bond has an irregular coupon it doesn't mean it was a bad deal." US issuers in particular tend to take a cosmetic approach to bond issuance rather than a functional one. And some borrowers get an easier ride than others. Miles Hunt, vice president, Euro-MTNs at JPMorgan, thinks it has a lot to do with an issuer's frequency of trading. He says: "What happens is people get comfortable with a sector and then look for the regular names. In the auto industry there are three types of issuer. Recently, BMW and VW have been getting the tightest spreads, then the big issuers such as Ford, GMAC and DaimlerChrysler. A third group of names like Volvo use the market for opportunistic funding at levels that make sense for them." Volvo has to make the best use of what is available. Volkswagen is rated A1 by Moody's, two notches above Volvo, and has issued over $4 billion this year. Albrecht Moehle, head of capital markets at Volkswagen, has some sympathy for issuers with less immediate appeal. He says: "There is no real recommendation I can give to these other auto issuers. Ratings and name reputation drive the market and in this respect Volkswagen has a big advantage. I have to follow my strategy and they have to follow theirs, because it is very difficult to achieve aggressive levels and everyone knows this." But although Volvo does not have the allure of some of its competitors, Lestin, at Volvo, is prepared to accept how the market works. This has helped to drive up Volvo's volumes in 2001. He says: "The funding we have done so far this year reflects our needs quite well, but we are flexible, and we like to maintain a regular presence in the market even if we don't have huge needs at the time." The attractive swap rate means yen has been used in 19 of Volvo's 29 trades this year, including its two biggest notes. But its longest trade, issued in June this year and maturing in June 2007, was a fixed-rate Kr600 million ($14.92 million) note. Morgan Stanley was the bookrunner and commented at the time: "We are still finding reasonable demand for auto company issues. They are well known and offer the best pick-up: around 50 basis points over swaps." Merrill Lynch is the arranger off Volvo's Euro-MTN facility and Dean Fogg, a trader on the MTN desk, says: "The auto sector has performed well all year, and spreads have tightened significantly. Towards the end of 2001 we may see some widening but it really depends on the forthcoming supply." The only tangible problem for Volvo could be an over-reliance on one sector. Hunt, at JPMorgan, says: "This year Volvo has done a lot of deals in yen because the Japanese funds in particular like short-dated trades from single-A borrowers. There is definitely interest in Europe and other areas, but presently the strongest bid is out of Japan." But unless Volvo offers wider levels it will have restricted access to Europe. Lestin, at the issuer, says he does not need to because he is price-driven and follows the best market. He says: "Where we place our paper has a lot to do with price. Most of our funds from the Euro-MTN programme in the first half of this year are what we would normally do in the CP market, so you can see we switch markets depending on the levels." This has brought some heated competition amongst MTN dealers for Volvo's paper. Lestin says: "We have an update coming in November and it is possible there will be a couple of changes to the panel. Reverse enquiry plays quite a big role in our set up, and you always like to reward good performers."
August 17, 2001
