VW Wooing Makes Scania Sweden’s Safest Company: Nordic Credit
The cost of insuring against a default on debt issued by Soedertaelje-based Scania is less than half of that of swaps for peers Volvo AB (VOLVB) and MAN SE. They are even lower than those on VW, according to price data from CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The default swaps are sliding, indicating an improved credit outlook, on speculation VW will succeed in its bid and pay off Scania’s 23 billion kronor ($3.6 billion) in debt. VW last month offered 6.7 billion euros ($9.3 billion) for the shares in Scania it doesn’t own, betting closer cooperation between Scania and its other truck units will cut costs and make the group more competitive. Scania this week said the offer is too low, while VW called it “highly attractive” and vowed to pursue its takeover.
“The decline in Scania’s credit default swaps reflects the market view that Volkswagen will most likely succeed in the takeover,” Mads Rosendal, a credit analyst at Danske Bank A/S, said by phone. “Scania is a really good credit story because it’s a well-run company that has been able to keep high profit margins over a long period of time while enjoying a high level of geographical diversity.”
VW would seek to combine Scania with its MAN SE (MAN) unit, to create a global heavy trucks unit that can compete with industry leaders Daimler AG and Volvo AB. Scania’s truck orders in January and February were on a comparable level to a year earlier and its market share in Europe in the first two months increased to 14.9 percent from 14.7 percent. Its operating margin was 9.7 percent in 2013. Volvo’s operating margin excluding restructuring charges was 2.9 percent last year, down from 6.5 percent in 2012.
Scania five-year default swaps are quoted at about 40 basis points compared with 57.3 the day the bid was announced. The 30 percent drop makes them the past month’s best performers among swaps of 35 Nordic companies tracked by Bloomberg. That propelled Scania ahead of TeliaSonera AB as the Swedish company with the lowest default protection cost.
“The market obviously regards Scania as a solid company,” Hans-Aake Danielsson, a spokesman for Soedertaelje-based Scania, said by phone yesterday. Marco Dalan, a spokesman for VW, said the company doesn’t have any comment on its default swaps.
Swaps 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. A total of 1,060 credit-default swaps covering a net $497 million of Scania’s debt were outstanding as of March 14, according to the Depository Trust & Clearing Corp. No contracts traded last week, DTCC data show.
Scania’s credit swaps are also the lowest among Nordic companies after Norway’s state-controlled Statoil ASA. MAN’s five-year default swaps are quoted at about 93.7 and Volvo’s at 102.5. VW’s are at 49.8, or 25 percent higher than Scania’s.
“The reason Scania’s swaps are even lower than Volkswagen’s is because the market expects the deal will go through and that the existing Scania bonds could be redeemed by the new owner,” said Rosendal, who’s based in Copenhagen. “This effectively shortens the duration of the CDS from five to three years or less and therefore also reduces the risk.”
Scania has no bonds maturing after 2017. It has a total of 17.1 billion kronor due this year and the next and 6.3 billion kronor maturing in the years 2016 and 2017 combined, according to data compiled by Bloomberg.
“We don’t foresee much change in bond spreads due to this deal,” Andreas Zsiga, chief credit analyst at Nordea Bank AB, said by phone. “The CDS may be reacting more. Historically, Scania has tended to trade somewhat tighter than VW, but with a deal, they should converge.”
The yield on Scania’s 1.625 percent 350 million-euro note due September 2017 is little changed at 1.1 percent since before the VW bid.
Zsiga has an underperform recommendation on the bonds while Rosendal has a hold rating.
VW has a controlling stake in Munich-based MAN and together they have 62.6 percent of the equity in Scania and 89.2 percent of the votes. Scania and MAN both make heavy trucks, while Wolfsburg, Germany-based VW’s own commercial-vehicles business produces delivery vans and the Amarok pickup.
“Scania is a very competitive company in its industry because it’s able to keep costs so low compared to its peers,” Danske’s Rosendal said. “Scania is the darling among truckmakers and the example for others to follow.”
Sweden’s government has held direct talks with VW, calling on the automaker to safeguard jobs should it succeed in its bid, Finance Minister Anders Borg has said.
Standard & Poor’s has assigned Scania an A- grade, the same as VW. MAN has a similar A3 grade at Moody’s Investors Service. Gothenburg, Sweden-based Volvo is graded Baa2 at Moody’s and BBB at S&P, which are two steps lower than the three competitors.
“S&P sees Scania’s credit risk as similar to Volkswagen’s risk due to the controlling stake they have, and we certainly agree,” Zsiga, who’s based in Stockholm, said. “We think that Scania is an A- credit grade in its own right.”