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Automotive companies fine tune funding with new tools

The automotive industry suffered during the post-credit crunch global economic downturn, as many companied faced ratings downgrades and limited market access. But as key economies return to growth the automotive market is following suit — and there are signs that the lessons learned during the crisis will form part of issuers’ future plans. EuroWeek spoke to senior figures within the industry, a senior banker and an analyst to find out the state of the market, how issuers are adapting to a changing funding environment and the potential for hybrid debt and other new tools to enter the mix.

Participants in this roundtable were: 

Rémy Bayle, head of corporate finance and treasury, PSA Peugeot Citroën

Stephen Howard, head of capital markets and derivatives, Toyota Motor Credit Corporation

Thomas Ditt, head of capital markets, Schaeffler

Falk Frey, senior vice president, corporate finance rating team, Moody’s

Yann Passeron, head of capital markets, RCI Banque 

Christian Reusch, global head of IG corporate origination and debt syndicate, UniCredit

Stefan Scholz, group treasurer, Continental

Craig McGlashan, moderator, EuroWeek

EUROWEEK: Conditions in the bond market have been markedly better for issuers since the European Central Bank’s cash injections at the beginning of 2012. But with the Federal Reserve likely to start reducing its liquidity supply soon, are we set for a bear market in bonds — and how should issuers prepare for it?

Thomas Ditt, Schaeffler: We do not see any indication that would prompt us to prepare for a bear market, although interest rates are clearly expected to increase in the medium to long term. How should issuers prepare? It’s always a question of being ready. If you are properly prepared and have your documentation in order, you always have an advantage when markets start to turn in one way or the other.

Christian Reusch, UniCredit: The ECB has made crystal clear that rates will stay where they are or maybe even lower. On the other side, the Fed surprised most market participants by continuing with its monthly asset purchases of $85bn per month, with the committee wanting more evidence that economic progress will be sustained before adjusting the pace of its purchases. However, most market participants expect a reduction before the end of 2013. 

Issuers should keep doing what they’ve been doing. Markets are open, the overall cost of funding is as low as it can be, opportunities are available across the curve and things couldn’t be much tighter in spread terms. There’s no reason not to come to market now.

Yann Passeron, RCI Banque: When Bernanke announced tapering there was a big jump in US rates and this trend spread to Europe by contagion. Swap levels have come down since the Fed announced on September 18 that it will hold back from tapering for the time being. They will probably go up again in the US, but I don’t think they will go up as much in Europe. European swap rates should come in a little because I don’t expect strong growth in the next few months. It might come slowly but we are not in the same cycle as in the US.

Spreads are at a historically low level, so there’s a bigger risk that they will go up than down — nevertheless, due to the ample liquidity available, I don’t see corporate spreads going up in the near future. There might be some small fluctuations but they should generally remain at the same level.

Our business model involves lending to companies or individuals that want to buy a car. We then fund ourselves either in the market or by other means. We can’t tell in advance what we’re going to lend so if we have to borrow at a higher cost than before then we increase our lending rates. That’s really mathematical and there’s no prefunding on our side.

Rémy Bayle, PSA Peugeot Citroën: We raise large amounts of funding in the bond markets both for PSA itself and our finance company, Banque PSA Finance. Having this access is important for managing our liquidity and financial security. Accordingly it’s very significant knowing that authorities like the Fed and the ECB are dedicated to keeping markets open. 

Of course, if markets were to react badly to any new rules or policies set by these authorities, we would have to prepare ourselves. However, our financing company is now well protected because its funding is raised through various pillars. The first is renegotiated credit lines from banks, the second is securitization and the last part is the bond market. Banque PSA Finance’s new bonds can be guaranteed by the French state, so even if markets deteriorate our financial company would keep access to the bond market.

We have always taken the view that PSA should hold significant financial security to be protected from a market closure. So even though it has a cost, we hold cash on the balance sheet so that we are not obliged to issue in difficult market conditions.

Stefan Scholz, Continental: The postponement of tapering took most people by surprise. But the debt markets are more reliable than two to three years ago so there should be access for quality issuers regardless of when tapering begins. A potential reduction in liquidity supply will not affect our ability to get to market. In theory, a better economy should lead to higher interest rates but also with a chance of lower credit spreads. That means a rise in rates may be compensated by a further narrowing of spreads, leaving coupons the same as before. But we have learned over the last few years that volatility is higher and everybody should be prepared to enter the market while it is there, because it could disappear in a day, month or year.

Stephen Howard, Toyota Motor Credit Corporation: The majority of our portfolio is comprised of consumer loans and leases and floor plan financing for our dealer group in the US. By definition those are pretty short dated assets. So when we issue debt we target an average maturity of around three years. That means investors buying our bonds are not as adversely affected as they might be by purchasing longer dated bonds, which would obviously be more susceptible to long term rising rates. We haven’t really had to do anything too dramatically different to what we always have. 

EUROWEEK: Falk, could you give us a rundown on the health of the European and US automotive markets?

Falk Frey, Moody’s: We revised 2014 market expectations in Europe down slightly, which was mainly because of weaker than expected GDP growth in some countries. However, the key message remains unchanged — we continue to believe that 2013 should be the trough of the cycle and 2014 should be no more than a levelling out on a sustainable new lower level of demand. Pre-crisis, we have had around 3.5m more car sales per year in western Europe. We do not foresee a recovery in demand to pre-crisis levels as we have witnessed in the US since 2009 because we believe there are clearly structural differences between those two regions.

The US has population growth and a car parc [the cars on the road in a country] which has grown quite old over the last couple of years to an average age of around 11 years. In Europe the average age of the car parc has also increased but it is only around eight years. Very importantly, US gasoline prices have come down from recent peaks and are cheap relative to Europe. The US housing market is recovering, the unemployment rate is improving and personal wealth is increasing through stock market improvements. There are a lot of underlying factors which cause US consumers to purchase new cars. In Europe, there has been no growth in population, the sovereign crisis has led to rising taxes for consumers and there is lower net income — so all the factors that are positive in the US do not indicate a similar pattern in Europe.

EUROWEEK: The automotive industry is clearly a cyclical business, as was shown during the financial crisis. Is the market yet giving issuers credit for an improvement in the cycle?

Frey, Moody’s: France and Italy’s struggling economies and higher unemployment rates have affected consumer demand for new cars. In contrast, in the UK, in addition to a slow recovery in the economy, consumer confidence has improved and there are attractive financing offers and cash discounts available — that is fuelling demand for new cars.

Peugeot, Fiat and Renault have strong positions in countries like France, Italy and Spain so they are the most affected by the lack of demand. We’ve seen profitability and cash generation capability between these manufacturers and the three German manufacturers — Volkswagen, Daimler and BMW — diverge as a result. 

The ratings have also diverged — the German firms are all rated in the single-A category and are pretty solidly positioned at their current rating levels. The French and Italian manufacturers, especially Peugeot and to a lesser extent Fiat, saw a continuous erosion in their credit quality and rating over the last few years. They have negative outlooks, so that means further pressure on their rating.

Bayle, PSA: Investors know that the automotive industry is cyclical and they consider and handle it within their analysis. We held a roadshow in Paris and London a couple of weeks ago where we got interesting feedback from investors. They know that there are struggling European markets that are putting some pressure on players, but also they recognise we made progress with our restructuring plan, which is on track. They are giving us this credit, that’s why the book we were able to build during our last bond issue a few weeks ago was very impressive, with very strong granularity.

Scholz, Continental: It’s good for issuers to show investors that they are not dependent on the economic situation in one region. Several automotive suppliers have got a good split of sales volume by regions — Europe, Nafta and Asia. Maybe 10 or 15 years ago was different, suppliers were focused on one or two regions only. There’s a certain dependency on Europe because it’s our largest region by sales but we’re achieving higher growth in Asia and this is well understood by investors. They know that we are a global automotive supplier and do not have a dependence on one region, like southern Europe for instance.

Ditt, Schaeffler: Almost all our bonds are currently trading above par and not only this — they are also trading on a higher level than what their respective credit rating is suggesting. So the market obviously perceives Schaeffler to be a stronger credit than what is reflected by its credit rating. Investors like us as a high yield credit since they see us as a somewhat unusual combination of high leverage on the one hand and a very strong operating business on the other hand.

Passeron, RCI Banque: It is true that the car industry is cyclical, but it’s regionally cyclical. If you look at the market since 2009 you see that the number of vehicles sold around the world increased constantly but with disparity among the regions. Western Europe shrunk but at the same time Asia and the Americas grew. 

The market gives credit to car makers’ geographically diversified activities. My view is that European sales figures have reached bottom and we should see stabilisation or a slight increase in the months to come. The market sees that already so we’ve seen spreads tighten. For companies that have diversified activities, spreads have been either stable or tightening in the last month and that’s even true of those companies that only have western European activities.

Reusch, UniCredit: Overall economic sentiment is positive in the main markets of Europe, Japan and the US. The latest numbers from Europe have been a little bit of a surprise as they’ve been more constructive than many people were expecting — not only in Germany but France and other countries too.

But it is important to consider the BRIC countries. They have grown in the past and are interesting markets in distribution terms. That will continue as long as China remains constructive. Europe is finding a bottom for the industry and I’m cautiously optimistic about the US market, given recent forward looking statements.

In Europe the funding market is in excellent shape with respect to investor interest and liquidity. Also, the overall cost of funding for the automotive sector is slightly lower or at the same level as it was in January. While rates have slightly increased across the curve spreads have been stable or have even tightened further. The market is constructive with investors ready to put money to work.

We’ve seen ups and downs in new issue premiums over 2013. But market conditions have been good since late August, following the usual summer lull. 

BMW’s dual tranche was one of the first post-summer deals. It is a good proxy for the sector and was very well received in the market. There were solid books, good granularity and good spread with a balanced new issue premium. It was a similar picture with the Volkswagen hybrid, which was in a class of its own because it was the first hybrid from a cyclical company. It found decent demand with a combined book of €4.7bn for a €2bn transaction. Shortly afterwards Renault and Peugeot took advantage of the favourable market conditions.

Howard, TMCC: The US market is definitely in great shape from an automotive sales standpoint — and as the sales market performs, so does the sales finance market. Absent a few of the more notable exogenous events that we’ve experienced such as the supply chain disruption following the earthquake and tsunami in Japan, things have been fairly steady for us for quite some time. There has not been much disruption at all from early 2009 onward.

Pricing has certainly fluctuated from a spreads to benchmark basis but they have been consistently less volatile as time has gone on. We continue to price at the tight end of our peer group and enjoy broad investor sponsorship.

EUROWEEK: Christian mentioned the BRIC countries. What’s the state of play there?

Frey, Moody’s: There is rising risk in expectations for demand in some emerging markets, especially in Brasil. Economic development there is somewhat disappointing, with high interest rates, rising inflation, and a weakening currency. That could weigh on car demand. There is an additional 1m unit manufacturing capacity being added in Brazil between 2011 and 2014, which is a 25% increase. That is not likely to be absorbed by local demand. The new capacity brings new competitors to the market, namely Hyundai and the Chinese companies JAC and Geely. 

We expect price pressure to rise here and if capacities are not fully loaded then it would put even more pressures on margins and profitability. Manufacturers that are reporting profits from that region — GM, Ford and Fiat — have already seen their profits under pressure and margins declining over the last 2-1/2 years. A further deterioration would be a big challenge for Fiat and Renault as the Brazilian market is a key source of profitability for them and mitigates some of their European challenges.

EUROWEEK: How does your credit trade in spread terms compared with similarly rated companies in other industries? Did the credit crisis have an effect on this spread?

Passeron, RCI Banque: If we compare RCI Banque to other French corporates with the same ratings, I’d say our spread is in the upper part of the range. Then if you compare us to other European banks with the same rating I’d say we were on the tighter part of the range. In 2006, spread dispersion was more or less at the same level for banks and corporates with the same rating. It’s really different today because we have more spread dispersion than before the crisis.

Scholz, Continental: Before the crisis, investors didn’t differentiate so much between sectors and the spread was always very low. Now, investors like to separate issuers by sector. But if I compare Continental to triple-B rated companies in sectors considered less cyclical the difference is not as large as it was a year ago, before we regained investment grade status from two agencies. Our sector is cyclical but our business model is well understood by investors and is more reliable than it was. This balances out and compensates a little bit for the volatility in the automotive industry.

Howard, TMCC: We don’t pay too much attention to firms outside the finance and banking sector. We’ve always priced at the tight end of our peer group, whether that was in the triple-A space or the AA/AA- space we’re in now. But it stands to reason that a heavy user of the capital markets like us would be very different to an infrequent issuer like an industrial company, just by virtue of relative value, relative risk, and other considerations.

EUROWEEK: Investors’ perception of the credit risk of banks in general has improved in the past year. Has this affected their view of the attractiveness of your bonds?

Scholz, Continental: Investors tell us that they prefer industrial companies more than before because their business risk is often more transparent than financial institutions’. Banks are getting more regulation, which limits their freedom compared to six years ago and means they cannot be clear on their strategy for the next five or 10 years. Investors prefer to focus on industrial company trends. They also prefer those with long histories. 

They are more reluctant to invest in new sectors, particularly after the internet bubble at the beginning of the last decade. 

Passeron, RCI Banque: French banks’ widening spreads in 2011 and 2012 had implications for the perception of all French credits. As a French issuer we suffered from it. But all French credit spreads have narrowed now that there are no longer fears that the euro will disappear and France is viewed as a trustworthy credit, so obviously we benefited from this effect.

Reusch, UniCredit: The two driving forces are how investors view the particular credit and the hunt for yield. Corporate issuers in general have had a good credit profile over the last cycle from 2008 onwards. Most have improved or are stable and balanced. By way of comparison, financial institutions’ deleveraging is significant and has an impact on the volumes they bring to market.

This will continue for one or two years. Disintermediation among banks is playing a role in new corporate issuers using the capital markets as an alternative source of funding to classic bank loans.

Overall issuance volume remains high and the number of issuers is increasing. There is much more granularity and variety in the market than before.

EUROWEEK: The credit crunch created a widespread realisation that borrowers with large funding needs should be able to tap as many different capital markets as possible, in case one market should close. Which instruments, currencies or markets have you added to your funding armoury in the past year and which avenues are you exploring for the future?

Howard, TMCC: We’ve always maintained that view. Before the crisis, we would routinely look at over two dozen discrete markets, investor classes, currencies or structures specifically for that purpose — to make sure we’re diversifying across these different channels, ensuring that first and foremost we have access to liquidity and secondly that the liquidity is cost-effective.

Since the crisis there has been a net reduction in some markets. For example, what used to be a very robust, non-core/local currency market has shrunk quite a bit because investors want larger and more liquid assets for their own portfolio management processes. But we still look across the globe and we react quickly if an attractive opportunity presents itself.

There are very, very few markets we haven’t looked at. If it’s out there we’ve considered it and we’re always eager to look at new ideas. That’s one of the things we pride ourselves on, being able to look at opportunities that others either won’t or can’t.

Bayle, PSA: Banque PSA Finance can’t access the short term paper market, so we bridged that by increasing our securitization and structuring volumes. That was a new pocket of demand. Banque PSA Finance also launched this year a new deposit account product for retail customers in France. That product saw a good response and is a new source of funding. But PSA itself remains more conservative and uses classic bond issuance.

Ditt, Schaeffler: Before 2012, we were solely financed by banks. By accessing the capital markets in early 2012, we achieved our goal of diversifying our funding sources. Tapping many sources — such as different markets, lenders, currencies and instruments — certainly was and is the right financing strategy for us as a truly global company. We are now, besides bank loans, diversified in bonds in euros and dollars, institutional loans in euros and dollars and retail bonds in euros. Euros and dollars are the two main currencies in our operating business, so we didn’t want to go beyond that with our financing instruments.

Reusch, UniCredit: Aside from classical benchmarks, issuers can print private placements in EMTN or Schuldschein format, for example. There are also avenues such as hybrids. Hybrids add colour, granularity and diversification to the funding mix. 

Last but not least, issuers can make use of the currencies and different investor pockets that are available. That has and always will play a significant role. Some issuers are in 15 or 20 currencies, at almost all parts of the curve. Not being dependent on one pillar is the name of the game. Furthermore local funding needs can be satisfied directly in the local market. 

There are not necessarily any other avenues left to tap. From a European perspective, the dollar market had not been so attractive in terms of the overall cost of funding or for any arbitrage plays because of the euro/dollar basis swap. But since October 2012 the swap has been a little better.

Scholz, Continental: During and after the credit crunch some funding sources were unavailable. But today we are back on track and have the full range we did before the crisis — the capital market, bank loans, sale of receivables and commercial paper. In September 2012 we issued our first dollar benchmark bond in the US. It was more attractive than the euro market. 

This year we’ve issued three euro bonds in Europe. But if we needed dollars we’d go to the US again because it’s a deep market and for dollar funding it’s usually a better alternative than raising in euros and swapping into dollars. Swaps are a little bit less attractive than in the past because of all the regulations around derivatives, where you could be obliged to deal with a clearing partner rather than a bilateral agreement with a bank. There is more counterparty risk than in the past, because counterparty risks with banks were not an issue before 2007/08. Why not just print in the currency required to avoid all that?

Passeron, RCI Banque: In the past we funded mostly in euros and then swapped the proceeds into the currencies we lend. Since 2010, we’ve had a very important strategy which has involved issuing in seven new currencies — Swiss francs, dollars, sterling, Swedish kronor, Norwegian kroner, Australian dollars and Singapore dollars. We’ve tried to have a regular presence in the bigger currencies particularly. We’ve issued several times in dollars and Swiss francs and we’d like to come back to sterling in the future. 

But I have a little fear about this strategy. We don’t have a balance sheet in some of those currencies so we are obliged to swap any bonds into euros. The European Market Infrastructure Regulation will force us to put collateral in front of these cross-currency swaps after 2015, which could be a danger for this strategy.

We will keep printing in currencies in which we have a balance sheet — for instance we will issue and lend in sterling — but issuing in dollars and swapping to euros could be a problem.

EUROWEEK: The investment grade/speculative grade boundary remains one that investors are very conscious of. How important is it for issuers?

Bayle, PSA: The investment grade/sub-investment grade boundary is very important because it dictates the type of investors that will consider investing in your bonds. It also has an effect on the price you have to pay, so even though we might build large books we will only be able to secure that by accepting to pay a higher yield.

Ditt, Schaeffler: It’s clearly an important boundary but it’s not necessarily the only relevant issue. It’s more important to properly explain your business model and to build trust with investors. This was the key to the success in our initial issue. We were rated single-B when we sold our inaugural bonds in early 2012, but nevertheless there was significant appetite at the offered rates. That wasn’t simply because investors didn’t have any alternative at the time — it was because they really believed in our story and our business model, regardless of the rating. There are also associated costs in being investment grade. You need to value these costs against the incremental rewards you may get from an investment grade rating. That’s a question every company needs to answer for themselves.

Reusch, UniCredit: Being investment grade certainly helps issuers but a non-investment grade rating is not necessarily a hurdle and doesn’t always require full high yield documentation. Some issuers, like Fiat, have fallen into the speculative grade category but have still been able to print using investment grade documentation with hardly any additional covenants. 

Scholz, Continental: We lost our investment grade status during the crisis but Fitch reinstated us in July this year and Moody’s followed suit in September. Those upgrades led to an increase in our bond prices. So yes, being investment grade is important as you can attract more investors and can pay a lower spread. But the high yield market has developed very well in Europe in the last few years — it’s much more liquid and involves more investors. This will continue because investors have to take more risk to get the higher returns that are no longer available from investment grade issuers.

Passeron, RCI Banque: The high yield bond market is very active but there is still a big difference in terms of spread between high yield and investment grade. So being investment grade is very important for us, as it enables us to access great market depth at a reasonable cost. 

The average rating of all companies went down over the last few years so obviously investors are looking at better spreads and are going down the rating grid, but nevertheless there is still a big difference in spreads between investment grade and high yield.

Howard, TMCC: We’ve seen a very bullish market for non-investment grade issues over the last few years, driven by investors’ appetite for yield. But it hasn’t been much of an issue for us. We have a very focused group of investors that consider our name a safe haven given our strong credit ratings and stable business model.

EUROWEEK: Deleveraging remains a hot topic. What is your company’s plan for how its leverage ratios should evolve?

Scholz, Continental: We’ve reached our leveraging target already. We’re in the area of one times, down from more than four times in the past. We have targeted a gearing ratio — net debt divided by equity — of 60%, which we had reached under the old International Financial Reporting Standards (IFRS) already. The new rules that were brought in this year had a negative impact on our equity level. But we are on the way to reaching a 60% or below ratio again by the end of the year. The deleveraging story has not stopped but we are not under pressure.

Howard, TMCC: We’re not overly focused on deleveraging but we are consciously keeping tabs on it. The focus for us is to make sure that earnings growth is on pace with asset growth. Ultimately the market looks to our affiliation with Toyota Motor which has an extremely low leverage ratio on a consolidated basis. For that reason we can be a little less focused on making sure our ratio is a specific number as opposed to an acceptable range.

Bayle, PSA: In this industry it is necessary to show to the market that you have strong financial security all through the cycle. Accordingly, you have to carry cash on the balance sheet, even though it has an impact on your leverage situation.

EUROWEEK: Retail funding, including through deposits, has become an important source of finance for some automotive finance companies. Is there potential to develop this further or has maximum capacity been reached?

Passeron, RCI Banque: We started funding through deposits in France in February 2012 and then in Germany in February this year. Our outstanding retail deposits rose from €900m at the end of 2012 to €2.6bn at the end of June 2013, equating to nearly 10% of our total outstandings. Our objective for 2016 is for deposits to reach 20%-25% of the total group outstanding so yes, we still have capacity there.

Bayle, PSA: It is important to have access to retail cash. We launched our deposit product in France this year and we could also bring it to other European countries.

Howard, TMCC: We’re not classified as an entity that can take deposits. In the US those that can are classified as banking institutions and we’re not regulated as a bank. But when we issue in the US or in the euro markets we target retail investors by maintaining low denominations on our securities so we can be distributed through the private bank network and access to retail in that way. But deposits are not something we are likely to do in the foreseeable future.

The Toyota name has always had a very strong following within the retail investor class. Going back to the old days of the Benelux investors and today with the Swiss and German private banks, for example, it’s always been a sector where bondholders will hold our paper. We’ll continue to target those investors either with low denominations on benchmarks or from time to time specific offerings through private bank-type transactions that can best cater to that type of investor.

EUROWEEK: What part do private placements — in euro medium term note format or otherwise — play in funding plans?

Reusch, UniCredit: You have to differentiate between the different varieties. Private placements often require reverse enquiries, where an investor expresses an interest and the bank finds the best fit. But MTNs can also help issuers fine-tune their redemption profile while fitting perfectly well with investor demands. Both sides of the equation are serviced well.

Some issuers have specific needs and come to dealers with a grid of what they need and then leave it to the dealers to find what is most suitable. It’s a very transparent approach.

A second interesting use of private placements is in niche currencies, whether it be New Zealand dollars or Danish kroner or whatever. With those, you specifically target high net worth individuals looking for solid credit but with a nice coupon. 

That adds a bit of currency risk. But it adds granularity and another route of funding. It’s not just an arbitrage game — you can raise cash in the local currency in a country where you might have operations so you avoid having to enter a swap.

All of the issuers that can do it are already in the market in some form or another. Some went via the EMTN format, some by Schuldscheine, some target specific investors or specific markets where they have an interest. Some issuers are very frequent like German original equipment manufacturers while others like Volvo often do smaller sizes. Others do deals that are slightly syndicated. It’s an important part of the funding toolbox.

Passeron, RCI Banque: We see two big advantages in MTNs. First, they give us access to maturities we have difficulty reaching with bonds — specifically 12-18 months. Second, as we don’t like big redemptions, MTNs let us avoid having to repay large sums on a single day — issuing several MTNs instead of large syndications gives us flexibility. 

But we don’t see a lot of demand for MTNs these days. We issued a lot in the past but not anymore. Investors are much more demanding when it comes to debt liquidity, which reduces MTN demand. Banks have asked us for pricing quotes but either the demand behind that hasn’t been strong enough to lead to deals or the investors chose another issuer as we haven’t printed a ticket for a while now.

Bayle, PSA: We’ve sold private placements in the past so it’s something that we could consider. But given the strong success and very large book we were able to secure with our last two bonds in September and February we don’t have to introduce private deals now. But if conditions were good we could look at private placements in the future, there is no reason not to.

Howard, TMCC: We tend not to post levels but we do entertain reverse enquiry more or less on a daily basis. We’re willing to look at pretty much anything, anywhere at any time — excluding during blackout periods or other types of internal limitations that we might have. That’s one of the things we use to differentiate banks in our minds — it is the ability to show us unique

transactions and ideas that are actionable. 

In terms of frequency of issuance it really just depends on market conditions compared to funding needs at the time. Pre-crisis we executed big, medium and small transactions more or less on a daily basis. In the post-crisis climate, where there is more of a premium placed on liquidity, we tend to print fewer transactions but in a larger ticket size. It’s a combination of what the market presents us with versus what we need to get done from a funding and liquidity standpoint.

We see a little bit of both pure private and club deals. If it’s a particularly specific trade from a maturity standpoint or with a very motivated investor who has an axe, we might just see one name in the order. There are

others where we’ll print and we’ll have follow-on orders that we’ll be happy to accommodate.

Scholz, Continental: You should prepare MTN documentation very carefully and not be in a hurry. It’s important to have the right documentation of the

programme that fits the company.

Our MTN programme allows flexibility, so we do not need about two months to prepare for a benchmark issue. That’s particularly useful if there is volatility in the market — it means you can issue when the window is open. If there is a private placement opportunity then we’d be interested — we sold one recently, for instance. 

It is also a useful tool if we had a need in a currency like Mexican pesos, say. It might be the cheapest long term financing source when compared with a bank partner or a syndicated bond. But currently our focus is on euro funding and we don’t have needs in other currencies.

Ditt, Schaeffler: Over the past couple of years, we focused on redesigning our capital structure, so privately placed MTNs did not factor into that. Our bonds are held by a broad investor base and we haven’t considered a narrow private placement yet. However, once we have made further improvements on the rating scale, an MTN programme may be a flexible instrument for the future.

EUROWEEK: How important are asset-backed securities for your funding plans and will that change?

Howard, TMCC: ABS won’t likely change in terms of size or importance to us, all else being equal. But it is part of our core funding programme. We use it as a diversification play. It also serves as a natural match term funding tool for us — the debt pays off at the same pace as the assets so obviously it’s nice from that standpoint.

But we can also use that as a hedge against unsecured markets if they become really expensive or completely unavailable. That was the case back in 1998 where we went through a period of six to nine months completely relying on ABS funding because the unsecured markets were just in such a bad state.

We have the flexibility to do that again if needed but for now we just use it as part of our programme.

Passeron, RCI Banque: We regularly issue asset backed securities. Around 15% of our funding is through ABS and this has been a stable percentage over recent years. We don’t have any plans to increase this proportion.

Scholz, Continental: Continental has used sales of receivables for about 20 years. It is an important instrument. We’re happy with the level we’ve reached. We have a more regional split when selling receivables than in the past. This is a way of reducing risks, because if you are only present in one country then if the partner in the transaction fails or the receivable volume goes down it could cause problems.

Bayle, PSA: ABS did not dry up too much at the end of 2008 and beginning of 2009 so we think that even in a bearish situation that market should be open, even with some difficulties to access it. We increased our use of securitizations at the end of 2012 and continued that this year. We have found a new equilibrium on our financial company balance sheet and we don’t want to go significantly higher.

Ditt, Schaeffler: We had already successfully implemented an ABS programme in the past, so we clearly may consider ABS again in the future to further diversify our funding structure.

Reusch, UniCredit: ABS is an important part of the funding mix as you can reach certain investors that would otherwise be unavailable. The level of issuer sophistication is quite high. Most of them arrange the programme themselves. Some use distributing banks to reach investors but there’s also very close dialogue between issuer and investor. Deals are usually at the shorter end of the curve.

EUROWEEK: How important is bank conduit financing to your funding? Are they just warehousing your new loans until ready for a term securitization?

Passeron, RCI Banque: Conduits are part of our funding strategy. We use them for portfolios that are too small for public funding. Warehousing is done through our master trusts structures. When public bonds amortise, receivables are transferred into auto subscribed tranches. 

Howard, TMCC: We don’t use conduit financing for that purpose. There’s no issue for us in terms of being able to originate and hold assets — we’re much more originate and hold than originate and sell. But that said, conduit financing is yet another avenue to liquidity and capital and for that reason we do employ that approach from time to time.

But it might be for completely different reasons than a lower rated or small start-up might need those conduit and warehouse types of infrastructure.

Scholz, Continental: We do not always sell our receivables to a bank conduit. It depends on the different programmes and the different refinancing structures of the purchaser. There would not be a severe impact if one conduit refinanced itself a little differently, because volume is limited in the different programmes and regions. 

It would be different if we only had one purchaser — they might be unable to refinance the instrument via commercial paper and have to place it within the banking sector. That could be detrimental to the availability of credit lines as the bank would have additional exposure to us. But this is not a risk because our banks prefer to have direct business with us rather than indirect investment. When we sell our receivables the bank usually takes the customer risk.

EUROWEEK: Have you noticed any growth in the ABS investor base for your recent vintage deals? What investors, if any, are still reluctant to participate?

Passeron, RCI Banque: In 2008, the investor base was really reduced to a minimum. Since then we’ve sold several bonds and at each issue we see investors returning or new investors coming on board. The community of investors is growing, including in different tranches. At the beginning investors were only buying triple-A, now they are buying other kinds of tranches. We also see geographically diversified demand — in the past they may only have used collateral from Germany, France or the UK, but now we see some demand for Spanish and Italian collateral.

Howard, TMCC: One area of growth is always in the government sector — state governments, public pension funds, country and state municipalities. There’s literally hundreds and hundreds of those types of investors across the US and we’re always interested in growing that investor base. 

From an incremental standpoint, those investors are becoming more comfortable with the asset class, specifically auto ABS, which is a completely different animal from mortgage backed or CLO type instruments. But it takes time to elevate the level of understanding around what auto ABS is and why it’s a safe investment. Anything involving governmental entities will typically just take a bit more time to process from an internal controls and approval standpoint.

EUROWEEK: At what point does the cost of funding in the securitization market no longer make sense?

Howard, TMCC: We look at relative value compared to our unsecured funding costs on a weekly basis. But asset backed deals require a significant amount of pre-work and preparation, between four to eight weeks or sometimes even longer. It’s not something we can readily put the brakes on if pricing suddenly changes by a few basis points. 

If there was a significant move we might reconsider but we’re not too focused on some incremental changes in pricing. We take a dollar cost averaging approach to our view on funding cost. Yes, we’re focused on cost but we’re also focused on diversification across markets, across tenors, across currencies and so on. From time to time that means printing a more expensive deal relative to what we could do elsewhere.

Passeron, RCI Banque: We use securitization as a funding diversification tool and try to establish a long term relationship with investors. We generally issue one public bond per year and these issues are not opportunistic ones, this is a result of a long term strategy. Obviously, cost of funding for securitization and bonds are not always the same. Sometimes ABS is a bit more expensive, sometimes it’s cheaper, but the volatility is less important than in the bond market.

EUROWEEK: Do you have a preference for the type of assets you securitize?

Passeron, RCI Banque: We try to adapt ourselves to the market. When investors started coming back, demand was more focused on German and French collateral — which was lucky because they are our two biggest markets. But it is about adapting ourselves to the market rather than wanting to securitize particular assets.

Howard, TMCC: We have no real concerns about jurisdiction from an asset origination standpoint. We try to not select our pools for ABS any differently from the portfolio make-up, just for consistency purposes. Investors can look at our public financial statements in terms of credit loss and delinquency performance and say, ‘OK, that’s typically what I’m going to see if I buy an ABS from TMCC.’ 

Our portfolio favours retail financing more than consumer leases and for that reason — as well as the fact that retail loan ABS is less expensive than lease ABS — we tend to do more retail. But we do have the capability to securitize roughly $60bn of our asset portfolio. Our next step is to build out our capability to securitize our dealer floor plan assets which is something we will be able to do once we onboard a new system for maintaining those assets. We’re in the middle of a transitional period here.  It’s another form of auto ABS that’s very commonly used. We’re probably one of the few who don’t at this point. It’s a viable product and very reliable.

EUROWEEK: Can the auto ABS market survive in its current state or will it need a deeper investor base to stay relevant?

Howard, TMCC: It’s definitely viable. In the US alone we’re probably expecting close to $100bn this year in auto ABS, across floor plan, lease and retail loan. You also have equipment financing, where the likes of Caterpillar and John Deere will securitize their industrial and agricultural equipment receivables.

This market has been one of the most resilient ever. The assets, the capital structure and the credit enhancement have stood the test of time. As far as I am aware there hasn’t been one ABS deal that has defaulted. The structure works, it’s not overly complicated and investors have come to realise it’s a very safe play. 

The other nice aspect is that the securities have a relatively short maturity. From a rising rate environment standpoint they might be a little more friendly to a manager who is worried about his 10 or 30 year investments going under water and the mark to market implications of that.

Passeron, RCI Banque: In its current state it can survive. Spreads have narrowed over the last two or three years, meaning more and more demand, so today there is no threat. My perception is that more and more investors will come.

EUROWEEK: How has your use of public securitization markets compared with your securitization for retention with central banks?

Passeron, RCI Banque: The share of public securitization — €3.3bn at June 2013 — is a little a bit higher than the share retained.

Howard, TMCC: We don’t have the option of the central bank approach in the US. So we strictly use securitization in the market — we have a lease public shelf, a retail loan public shelf and we also do private conduit financings from time to time. We also we retain part of the capital structure on our public ABS issuances on our balance sheet, which not many others do. That’s part of our contingent liquidity programme, where we rate and register the securities, then hold them on our balance sheet. We can sell those to the market if we were ever in need of liquidity on a short term basis. But that’s as close as we’d get to the bank repo approach.

EUROWEEK: Is hybrid capital likely to play a growing role in the finance of automotive companies, following the mandatorily convertible bonds and then hybrid capital securities issued by Volkswagen?

Reusch, UniCredit: Hybrid capital is an asset class of interest to corporate issuers in general and investors. It provides additional equity credit for the issuer and gives investors a very interesting coupon, even from companies with a solid credit profile and a decent investment grade rating. 

Take VW. Its hybrid yielded 4.05% for the non-call five year tranche and 5.25% on the non-call 10 year. That’s a fantastic yield with respect to the underlying credit quality. It has a Baa2 rating, which is two notches below the equivalent senior rating.

This is the year of hybrid issuance. We’ve seen around €17bn-€18bn year to date and there’s another €5bn-€7bn to come in the euro market alone.

There isn’t a big general need for all the other automotive firms to hop on the bandwagon but everybody is monitoring the market and the overall cost of funding is quite attractive.

Howard, TMCC: It’s a definitive no for us. There just isn’t a need. We have a single shareholder which is our parent company, we have a very simple capital structure — senior debt and equity, that’s basically it. From time to time we’ve looked at doing things like subordinate structures but it’s never really made sense from our own internal standpoint.

Scholz, Continental: We would not sell hybrid debt although it could be helpful for others. It’s useful from a rating perspective but we do not need this. The VW deal showed that now companies from so-called cyclical industries have access to the market, rather than just the likes of utility companies.

Bayle, PSA: We’ve looked at hybrids and noticed our peers have entered that market but it’s not something we are considering at this moment.