VW Sells 2.5 Billion-Euro Convertible Bond to Boost Funds

VW Drops After Announcing Convertible Bond Sale
VW has largely shrugged off a slump in the European car market, which is poised to suffer its biggest annual decline in 19 years in 2012, by relying on growth in the U.S. and China and expanding the Audi luxury brand. Photographer: Michele Tantussi/Bloomberg

Volkswagen AG, Europe’s biggest carmaker, sold 2.5 billion euros ($3.2 billion) in bonds that will automatically convert to shares at maturity to boost liquidity following the purchases of Porsche and Ducati.

The three-year notes will pay an annual coupon of 5.5 percent, the Wolfsburg, Germany-based automaker said in a statement today. The minimum conversion price has been set at 154.50 euros and the maximum at 185.40 euros, VW said.

The carmaker, which this year paid 4.49 billion euros for the 50.1 percent of sports-car maker Porsche it did not already own and bought Ducati motorbikes for 860 million euros, said it needs the money to strengthen funding. Net liquidity at the end of September fell 57 percent to 9.22 billion euros. Analysts said the money may be used to complete the takeover of German truckmaker MAN SE, which VW already controls.

“The bond sale was a bit of a surprise as VW’s net liquidity was quite good at the end of the third quarter,” said Michael Punzet, an analyst at DZ Bank in Frankfurt. “It seems that VW wants to proceed with the takeover of MAN SE. The acquisition of the shares of the truckmaker VW does not already own will cost about 3.3 billion euros.”

VW dropped as much as 7.05 euros, or 4.3 percent, the biggest decline since Aug. 30, to 155.35 euros, and traded 4 percent lower as of 11:52 a.m. in Frankfurt. MAN advanced as much as 3.80 euros, or 4.8 percent, to 82.92 euros and was up 3.2 percent.

Takeover Targets

Along with MAN, VW could also use the money to purchase the shares in Scania AB that it does not own or to take a stake in Navistar International Corp. in the U.S., Bernstein Research analyst Max Warburton said. The money could also be used to buy Alfa Romeo or Ferrari from Fiat SpA, he said.

“VW raised money in a similar fashion in 2010 and used this money to pay for the installment of Porsche,” Warburton, who rates the shares market perform, said in a note to investors today. “Is VW planning further acquisitions?”

The mandatory convertible bond sale is “credit positive and will safeguard VW’s current ratings,” Sven Kreitmair, co-head of corporate credit research at UniCredit SpA in Munich, wrote in a note to clients. The carmaker is rated A3 by Moody’s Investors Service, four levels above junk, and an equivalent A-by Standard & Poor’s.

UniCredit forecasts a tightening of about 10 basis points to 20 basis points in Volkswagen’s cash bond and credit-default swap curves, Kreitmair wrote. The Italian lender maintains its marketweight recommendation on the automaker’s bonds and favors the company’s 5.375 percent notes due in May 2018 and 7 percent securities maturing in February 2016, he wrote. Credit-default swaps are derivatives used to insure debt.

Profit Goal

VW has largely shrugged off a slump in the European car market, which is poised to suffer its biggest annual decline in 19 years in 2012, by relying on growth in the U.S. and China and expanding the Audi luxury brand. VW reiterated two weeks ago a target to “match” 2011’s operating income of 11.3 billion euros this year, even after profit slipped 1.6 percent in the first nine months of 2012.

“Does VW really need this cash? We can’t see it to be honest,” Warburton wrote. “For a company generating over 2 billion euros if free cash flow a quarter, VW’s problem is arguably what to do with its current liquidity, rather than having any need for capital.”

Truck Operations

Volkswagen’s voting rights are 75.03 percent in MAN and 70.94 in Soedertaelje, Sweden-based Scania. VW has said it may pursue a domination agreement for Munich-based MAN to gain greater control as VW seeks a deeper integration with Scania.

“We consider all our options to push forward the integration of our truckmakers,” Marco Dalan, a VW spokesman, said today when asked about the analysts’ comments.

The bonds will automatically convert if the company’s ratings drop below Baa3 and BBB- into junk, or speculative grade, according to the offer document.

S&P rated the bonds at BBB, citing the deal’s “high” equity content.

The bonds was issued by Volkswagen International Finance NV with a guarantee from the Wolfsburg, Germany-based parent. securities, according to the offer document. Bank of America Corp., Credit Suisse Group AG and Deutsche Bank AG managed the sale, according to the document.

“We want to make our position even more robust and flexible, and the planned convertible notes will further strengthen our liquidity and capital base,” Chief Financial Officer Hans Dieter Poetsch said in an e-mailed statement.

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