Invesco Buys Volkswagen Hybrid Bonds on Bet Selloff Was Overdone

Invesco Ltd. bought Volkswagen AG’s short-dated hybrid bonds, betting sharp declines in the debt following an emissions-rigging scandal at the German automaker were excessive.

The Atlanta-based manager of about $780 billion in assets this week bought 3.875 percent hybrid notes that are callable in September 2018 because they offer a higher yield than securities with a later call date, according to fund manager Lyndon Man.

VW’s bonds fell to records after the company last month admitted having cheated on U.S. exhaust tests since 2009. The declines inverted the so-called yield curve on the company’s hybrid debt, with investors demanding a premium to hold bonds that can be redeemed sooner, a market distortion that typically happens when a borrower is considered in distress.

“We think the moves are overdone,” said Man, who is based in London. “An inverted credit curve suggests Volkswagen is a default candidate, but we don’t think that’s the case. Volkswagen doesn’t have a liquidity issue.”

Volkswagen has 7.5 billion euros ($8.4 billion) of outstanding hybrid bonds, which combine elements of debt and equity. They have no fixed maturities but can be bought back early.

The hybrid bonds with the earliest call date, 1.25 billion euros of notes that attracted Invesco, are quoted with a yield of 6.5 percent, according to data compiled by Bloomberg. That compares with 5.8 percent on 1.4 billion euros of notes callable in March 2030, the data show.

VW’s chief executive officer resigned after the scandal and the three biggest rating companies put the automaker on review for downgrade. New CEO Matthias Mueller said this week that Wolfsburg-based VW will delay or cancel non-essential projects to slash spending in the face of fines and potential legal costs.

Reputation Damage

Damage to VW’s reputation may lead to more than 35 billion euros in costs and lost revenue, Warburg Research estimates, and this week Mueller said that the 6.5 billion euros set aside to fix about 11 million rigged diesel vehicles won’t be enough to cover fines as well. The company had about 32.7 billion euros of cash in the second quarter, according to data compiled by Bloomberg.

“The CEO’s rhetoric is encouraging to bondholders, saying that the company will cut investment or spending to preserve the balance sheet,” said Man. “It looks like the company will do all it can to preserve its rating.”

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