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Corporate Bonds

Crisis Talk — with VW's treasurer: how to cope without revenue

Volkswagen is one of the world’s biggest car companies and, in many years, Europe’s biggest corporate bond issuer. But being an A3/BBB+ rated credit with a strong following in the market does not guarantee you can refinance a €200bn debt load when a pandemic shuts down nearly all the world’s developed economies.

As the coronavirus crisis struck Europe with full force in March, it was perfectly clear no one was going to be buying new cars.

VW has been through crises before — most recently the ‘dieselgate’ emissions cheating scandal in 2015 that nearly halved its share price in a fortnight. But that did not bring a halt to all sales.

Capital markets have recovered from the extreme anxiety of mid-March, and blue chip companies have crowded into the bond market to raise funds to get them through the crisis. At first it seemed car companies would find it hard to issue — then, they did, including Volkswagen Financial Services.

But still, Volkswagen’s industrial arm has not appeared.

Jörg Boche, head of group treasury at Volkswagen in Wolfsburg, was in charge of the group’s funding in 2015, and is now.

He spoke to GlobalCapital on April 29, the day Volkswagen released its first quarter results, about how the company has dealt with a crisis unlike any before, and the financial measures necessary to steady the ship.

Meanwhile, VW is reviving. Last week, it reopened its Zwickau factory in Germany, and on Monday this week, the main plant in Wolfsburg and three Škoda facilities in the Czech Republic came back to life.

When we spoke in mid-March you said your top priority, after the health of your customers and workers, was to get spending, production and demand in balance as soon as possible, to conserve cash in the business. Your CEO Herbert Diess said at the end of March that the company had fixed costs of about €2bn a week and no revenues outside China.

What are the most important actions you have taken to deal with this?

The immediate crisis response has been a concerted effort at cash conservation in the entire company.

You do this in cooperation with other people. It’s not just treasury, it’s sales, production — it’s a team effort to put together a cash conservation strategy.

We, from the treasury side, can create transparency for everyone. You try to have good cashflow forecasting and then work with the rest of the company to make sure you’re cutting costs, cutting cash [going] out and add some financing to it.

We tried to build our buffers  — to make sure we had enough liquidity. When you stop producing, the first thing that goes down is revenue, and for a while cash continues to flow out. But the longer you stop, at some point your cash outs also go down. Over time the cash burn changes — it’s hard to pin a number on it. I would look at that number [€2bn] as a worst case.

We have been able to decrease cash outs as well as buffer shortfalls in revenue — by that token, we were able to conserve some cash.

I always look at the gross liquidity in the automotive business, which we’ve just announced was €33.8bn at the end of March. That is the firepower you have — cash and liquid investments. It has gone up by a couple of billion.

I think we’ve done it quite well. But you’re only ever as good as your next challenge — the next challenge will be to ramp production back up and sell cars again.

This morning your CFO Frank Witter said the second quarter would probably be the worst of the crisis for Volkswagen, or at least, would be worse than the first. Have you now done all the actions you need to, so that the business can survive that, or will you have to do more?

I think the belt tightening will have to continue. But I also think, while the second quarter is probably going to be the worst, the focus is different. We are now also in a process of starting producing again. We’re not only focusing on cash conservation but trying to shift the focus to coming back to some kind of normality in the market — a new normal.

We’re making sure production can function under the conditions of Covid-19. And the market for new cars will come back. We also believe we will be able to lay the foundation for a slow recovery of the business in the second half of this year.

Your results say you raised €7.5bn of financing in the first quarter. So far, in this crisis, Volkswagen Financial Services has issued a €2.15bn bond on March 30 and you have done securitizations. But the industrial company hasn’t come to the bond market yet. Why?

First of all, we have a pretty good €10bn syndicated facility. We drew €3.3bn of that, which lowered the urgency for the automotive side to go into the senior unsecured market. We also added some bilateral lines. These channels have worked pretty well for us so far.

We have been able to keep our gross liquidity in the automotive side stable or even increase it. We will certainly look to the senior unsecured market as time goes on but we were not pressed to go to market immediately once the crisis started.

Therefore we missed the first wave of refinancing when a lot of other companies issued, because we didn’t need to join that bandwagon.

Other companies have issued bonds, even though they didn’t need the money, just to be on the safe side. Volkswagen has a huge balance sheet and needs a lot of financing. It sounds like you haven’t issued yet because you think the terms are going to get better?

It seems like the terms are getting better. I hope this will continue. Our secondary spreads have come in from the wides quite substantially. Also new issue concessions in the market have recovered to some degree.

The question is which instrument you use first. You can’t use them all at the same time, so you have to lay out some strategy and take one step after another. Our main goal is to keep a high level of gross liquidity, which we could do so far. In that process over time we will certainly look to the bond market.

Why do you think the corporate bond market is so strong, with huge books for deals and spreads tightening?

It certainly helps that financial markets have been supported by central banks in the US and Europe. It is also quite important that on the fiscal side governments in developed countries have been quite aggressive and are starting to roll out programmes which are starting to show effects in economies. Also I think people have more visibility now than four or six weeks ago. They can look at China and get a good view of how an economy can bit by bit come back from the depths of the crisis. Some of the things we see in China are quite encouraging. Also we have a clearer view of how the pandemic is evolving in our countries.

Companies are further down the road in terms of learning how to deal with this crisis.

We are starting to produce again in Germany — in China we’ve done it for weeks already. So there’s a lot more visibility than there was in March. Investors can get a better idea of which companies are hardest hit and which are those most likely to survive.

Have your banks been happy to extend credit to you?

The banks have been supportive. I don’t know if they were all equally happy we were drawing on our revolving credit facility, but with our banking group there’s a lot of mutual trust. We know each other, we’ve been through plenty of tough times together. Everything has worked out really well so far.

When you wanted extra loans, why did you use bilaterals instead of a syndicated facility?

It was a better strategy — it’s more digestible for the market and obviously we already have a big syndicated line, so there was no need to do another. Bilaterals were a very handy instrument to get some incremental funding.

They wouldn’t add up to a substantial syndicated line.

You’ve been through a few crises before, notably Volkswagen’s diesel scandal in 2015. Someone told me they thought the coronavirus was not as bad for VW’s capital markets access as that had been.

It’s a different profile. In the diesel crisis it’s true in a sense it was worse, because we had really deep problems in our company which were of our own making. That plunged us into quite a deep crisis, which was very stressful. But the automotive market and the financial market were in pretty good shape.

For senior unsecured bonds it was impossible for us to issue, as well as hybrids. But three instruments worked quite well — commercial paper, ABS and syndicated bank loans.

We arranged a big bank loan for €20bn. In the end, our funding was quite good, because the markets around us were in pretty good shape.

In March, you were worried about the distress in the Euro-commercial paper market. Has it recovered?

It was in the process of freezing up. Since then, the ECB has come into the market and that has had some effect. We have used the market but I think the recovery process is not a very strong one. [Pricing] levels are somewhat elevated and ticket sizes are not very large.

Over time, there will probably need to be some more buying by the ECB to really get it back into a modus operandi that one could call smooth.

BMW issued a $4bn bond at the beginning of April, and some bankers say European companies should go straight to the dollar market because they can get an arbitrage from the basis swap.

It’s certainly a deep and interesting market. I think the arb of funding in dollars and swapping back to euros has been better than it is now. This notwithstanding, you have to be in the dollar market on a regular basis.

It’s true our issuance in the US market compared to Europe has been comparatively low, especially compared to BMW and Daimler, in recent times. It was mainly due to the fact that with the diesel scandal it was tougher for us to issue there.

You’ve continued to use securitization; and have you considered the Schuldschein market?

No, I don’t watch the Schuldschein market. Securitization is something we’ve done for a long time — it’s an important pillar in financing our financial services business. It has proved to be very stable and resilient during the financial crisis and the diesel scandal, so we continue to be in it when appropriate.

Have you done any regional financing, either with banks or local capital markets, through any of your operations in different countries?

In general it is part of our strategy to do a fair amount of local funding. Since the outbreak of the coronavirus crisis that has got more difficult. Yes, we will do it to the extent possible, but not all markets are in good enough shape to allow local financing.

On the bank side it’s easier. There are talks going on — I think we will be able to do some.

You lost several hundred millions in the first quarter on the mark to market value of commodity hedges, particularly on aluminium but perhaps other metals. If you don’t hedge, the business could lose cash if raw material costs are high. But if you do hedge, you can get a slap from the accounting system if the market goes the other way. Has this changed your view on how to hedge?

It’s just something we have to put up with. I think the stockmarket is clearly looking through this — analysts understand this. It’s mainly due to the collapse in prices for some of the metals we use, which was pretty unprecedented. These are unrealised losses. To the extent that these markets recover, the whole thing will move and unravel these paper losses.

In several countries, including Germany, governments have put together packages to provide state-supported financing to companies. As a multinational, active in many countries, have you considered any of these schemes?

If you don’t need it, I don’t think you should do it, just for fun. We are clearly in a situation where we can use self-help, with a cash conservation strategy, plus using public markets and bank financing to give us everything we need. I don’t think it makes a lot of sense to turn to the state.

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