Porsche Joins Bugatti to Spur VW Bonds Record: Corporate Finance

Volkswagen AG CEO Winterkon
Martin Winterkorn, chief executive officer of Volkswagen AG. Photographer: Guenter Schiffmann/Bloomberg

Volkswagen AG’s decision to spend 4.46 billion euros ($5.5 billion) of cash to complete its acquisition of Porsche SE makes the automaker more creditworthy in the eyes of investors, who pushed its bonds to record highs.

VW’s 1.25 billion euros of 2.75 percent notes due 2015 rose to 104 cents on the euro, cutting the yield to 1.3 percent, according to data compiled by Bloomberg. Credit-default swaps protecting the Wolfsburg, Germany-based company’s debt were the most-traded of any corporate contracts globally in the week through June 29 and fell the most compared with European auto firms in the past month, according to CMA in London.

“VW’s cash flows will likely be more stable in the future because Porsche’s customers are wealthy people in general and aren’t as impacted by economic downturns,” said Frank Hussing, a Frankfurt-based credit analyst at Commerzbank AG. “VW’s group business profile is already strong and it will become much stronger due to the addition of another premium brand.”

Chief Executive Officer Martin Winterkorn said he wants to overtake General Motors Co. and Toyota Motor Corp. to become the biggest carmaker by 2018 and values the Porsche business at 20 billion euros. VW, which said it held 19.1 billion of cash at the end of March, also took on 2.5 billion euros of debt when it bought the 50.1 percent of the iconic 911 sports car maker that it didn’t already own.

Lamborghini, Bentley

VW, whose other luxury brands include Lamborghini, Bentley, Bugatti and Audi, sidestepped a tax bill of more than 900 million euros by classifying the deal as a restructuring rather than a takeover. Its symbolic payment of one VW share on top of the purchase price allowed it to take advantage of the tax-saving plan, which was approved by German authorities.

VW is Europe’s largest carmaker, sitting behind Toyota and GM in terms of deliveries of cars and trucks globally at the end of the first quarter. It sold 2.16 million vehicles in the first three months of the year, compared with 2.28 million for Detroit-based GM and 2.49 million for Japan’s Toyota.

Porsche sold 30,231 cars in the period, an increase of 29 percent in the similar period a year earlier, according to its first-quarter earnings statement. Deliveries of its Panamera sedan, which retails at about $94,000, jumped the most with a 29 percent advance.

“Together we are more capable than ever of becoming the best auto company on the planet,” Winterkorn said July 5 when he announced the deal.

Credit Ratings

VW is rated A3, the seventh-highest investment grade ranking, by Moody’s Investors Service. Fitch Ratings and Standard & Poor’s grade the company an equivalent A-.

Because of the cash payment for Porsche there’s been a deterioration in VW’s leverage ratio, with adjusted net debt compared with earnings before interest, tax, depreciation and amortization rising to 0.7 times from 0.4 times before the transaction, according to Moody’s. That’s still below the 1 times the ratings company wants VW to maintain if it’s going to upgrade the ranking, Moody’s said in July 6 report.

“The consolidation of Porsche into VW group will enhance VW’s share of revenues generated from premium cars,” said Falk Frey, a senior vice president at Moody’s. “It will enable VW to eliminate current complex processes in place for working on common projects and sharing common platforms.”

VW shares rose 12 percent this year, including a 4 percent gain this month, data compiled by Bloomberg show. The company has a market capitalization of 58.7 billion euros.

Operating Profit

Operating profit for 2011 was a record 11.3 billion euros, a 59 percent jump, and VW announced in April a 10 percent rise in first-quarter operating profit to 3.21 billion euros from 2.91 billion euros a year earlier. Increased revenue and auto deliveries offset higher development spending as profits beat analysts’ forecasts.

The Porsche transaction “is great news for VW,” Arndt Ellinghorst, an automotive analyst at Credit Suisse Group AG, told clients in a note July 5.

VW was able to acquire the carmaker for an enterprise value of about 11 billion euros when it should be worth at least 21 billion euros, based on an enterprise value-to-sales ratio of 1.5 times, Ellinghorst said.

“The premium segment will in future represent around half of the operating profit of the Volkswagen group,” VW Chief Financial Officer Hans Dieter Potsch said July 4.

As of July 6, investors demanded 102 basis points, or 1.02 percentage points, more than benchmark rates to hold VW’s bonds, Bank of America Merrill Lynch’s Global Automotive index shows. That’s below the 148 basis-point average for the 276 securities included in the measure, including notes of Bayerische Motoren Werke AG, Daimler AG and Ford Motor Co.

Maturing Debt

The company has 5.25 billion euros of bonds maturing this year, rising to more than 9 billion euros in 2013, according to data compiled by Bloomberg. It has 53.5 billion euros of bonds and loans due through to 2049.

Credit-default swaps protecting the company’s debt from default for five years fell 7 percent since the start of June to 151 basis points, data compiled by Bloomberg show. The contracts have declined 11 percent this year.

A decline signals improved perceptions of credit quality. A basis point on a swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Most Traded

CDS on Volkswagen were the most-traded corporate contracts globally in the week through June 29, up from 615th place the week before. It had the biggest increase in weekly trade volumes among 1,000 entities tracked by the Depository Trust & Clearing Corp. with swaps covering a daily average of $290 million last week compared with $110 million over the past month.

Perceptions of Porsche’s creditworthiness have also improved on speculation the company will use acquisition cash it receives to fully repay 2 billion euros of bank debt and invest in materials for the auto industry, real estate and energy trading. Its CDS were the world’s best-performing contracts last week, falling by 37 percent, according to data compiled by Bloomberg.

“There are a number of key areas where VW is expected to step ahead of BMW and Daimler,” said Vanessa Cochrane, a London-based automotive analyst at Mizuho International Plc in London. “It’s definitely on track to becoming the world’s leading car maker.”

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