Volkswagen Catches Caterpillar’s Ruble Bond Bug: Russia Credit

Volkswagen AG plans to issue its debut bond in rubles, almost a year after Caterpillar Inc. became the first foreign blue chip to sell debt in the currency, as Europe’s largest automaker seeks to expand in Russia.

Volkswagen Bank RUS LLC, a unit of Volkswagen Financial Services AG, hired Raiffeisen Bank Russia and Rosbank-SG CIB to arrange the sale, Rosbank said in an e-mailed statement Oct. 28. The yield on a two-year note may range from 7.75 percent to 8.25 percent, said Egor Fedorov an analyst at ING Groep NV in Moscow.

The German carmaker has spent about $1 billion in Russia and started production in the Kaluga region near Moscow six years ago as foreign competitors including Ford Motor Co. and Toyota Motor Corp. sought inroads into a market once dominated by domestic producers. Volkswagen boosted market share to 10.9 percent in the first nine months from 10.7 percent a year earlier, according Russia’s Association of European Businesses.

“It makes sense for Volkswagen Bank Rus to diversify funding sources and be more independent from the parent,” ING’s Fedorov said by e-mail on Oct. 28. “The unit gives retail loans to buy cars in rubles, while if it takes funding from the parent, it will be in euros.”

Volkswagen is the largest auto group in Russia after Renault-Nissan, which controls Lada-maker OAO AvtoVAZ, and No. 2 Hyundai-Kia. Investor meetings will be held from Nov. 6 to Nov. 8, according to the bond organizers. Volkswagen will probably try to sell 3 billion rubles to 5 billion ($94 million to $156 million) rubles of notes to test demand, according to ING.

Caterpillar Yields

Caterpillar sold 5 billion rubles of notes maturing in 2015 last December. The yield was little changed at 7.20 percent today, 141 basis points above a low of 5.79 percent on April 11, according to data compiled by Bloomberg.

The share of cars bought in Russia using loans increased to 44 percent in the first half from 34 percent a year earlier, with credit totaling 1.2 trillion rubles, according to a July report from the Avtostat researcher and National Bureau of Credit History.

The VW bond will be guaranteed under an irrevocable offer by Volkswagen Financial Services AG, which is rated A3 by Moody’s and A- by Standard & Poor’s, according to the Oct. 28 statement. Caterpillar International Finance Ltd. sold its ruble bonds guaranteed by Caterpillar Financial Services Corp., ranked A2 at Moody’s at the time of the issue.

Ruble Issuers

“There is good liquidity in the ruble market at the moment,” Konstantin Nemnov, who helps oversee the equivalent of about $3 billion as a fund manager at TKB BNP Paribas in St. Petersburg, said by e-mail yesterday. “But there will only be demand for this particular issue if the Russian unit or the issue itself gets a proper rating.”

Marc Siedler, a spokesman for Volkswagen Financial Services, declined to comment on the details of the issue. The Russian unit registered 13 tranches of bonds for a total of 50 billion rubles in August, regulatory filings show.

Volkswagen would join issuers including OAO Transaero, Russia’s second-biggest airliner, and retailer X5 Retail Group NV selling ruble debt after the Federal Reserve’s decision to delay a reduction in stimulus saw emerging-market yields drop. The rate on Russia’s government bond due January 2023 fell 15 basis points, or 0.15 percentage point, since Sept. 18 to 7.23 percent on Oct. 29.

The yield on Russia’s dollar bonds maturing in March 2030 fell five basis points to 3.78 percent by 2:04 p.m. in Moscow today. The extra yield on Russia’s dollar debt over Treasuries dropped three basis points to 216 basis points, according to JPMorgan Chase & Co. indexes.

Strong Brand

Volkswagen’s plant in Kaluga can produce 150,000 cars a year, while the German company also has models assembled at billionaire Oleg Deripaska’s GAZ Group plant in Nizhny Novgorod. Russia’s car market will probably amount to about 2.8 million vehicles this year, versus projections exceeding 3 million units at the beginning of the year, according to Ford.

“The Volkswagen brand is strong, that’s why its sales are relatively stable even as the whole car market in Russia is declining this year,” Vladimir Bespalov, a VTB Capital analyst in Moscow, said by phone on Oct. 28.

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