The last year has been steady for automotive companies raising leveraged finance in North America and Europe, even though overall issuance figures fell from US$46.8 billion in 2018 to US$36.6 billion in 2019 across both regions.
The main reason for the dip was a fall in North American automotive loan issuance, from US$33.5 billion to US$16.1 billion year-on-year. Loan issuance in Europe, by contrast, rose from US$7.3 billion (€6.7 billion) in 2018 to US$9.8 billion (€8.9 billion), much of it stemming from the successful €6.3 billion loan by Fiat Chrysler (the second largest loan in Europe overall in 2019).
Bond issuance, meanwhile, was up on both sides of the Atlantic as automotive borrowers took advantage of strong investor appetite for bonds in a low interest rate environment. In North America, automotive high yield bond issuance rose from US$2.7 billion in 2018 to US$3.6 billion, while figures for the sector in Europe more than doubled, from US$3.3 billion in 2018 to US$7.1 billion. European issuers received a further boost from the European Central Bank’s corporate bond buyback program.
Refinancing dominates the automotive sector
Although there wasn’t much global automotive M&A activity in 2019, companies in the sector continued to tap a favorable market to refinance existing debt and extend maturities. The Fiat Chrysler loan, issued late in March, extended the maturity of its syndicated bank facility. The fifth largest bond in Europe in 2019, issued by IHO Verwaltungs, a holding company controlling automotive supplier Schaeffler, was also raised for refinancing purposes. When combined, overall use of proceeds figures for North America and Europe show refinancing amounted to US$23 billion in total issuance in the automotive industry.
The 2019 issuance figures reflect the fact that automotive companies are frequent and consistent issuers. Groups in the sector tend to open the market each year so they can lock in liquidity ahead of any blackout periods around annual and quarterly reporting. This also leaves time later in the year to return to market if required. BMW already came to market in January 2020 and other groups are expected to follow suit and secure financing for general corporate purposes or refinancing.
Multinational automotive groups have high demand for local currency in the markets where they operate. They can use currency hedges but prefer their debt profiles to match liabilities as closely as possible. When they have a chance to raise in local currency, they do so.
That said, it was surprising that so few European issuers tapped the US market with 144A transactions (US bond securities that can be traded between qualified investors). Clear demand for US dollars exists in the automotive sector, so there may be more 144A deals in 2020, but the relatively low levels of activity last year may indicate that issuers prefer not to go through the intensive process of setting up a 144A transaction when the European market is open for business and borrower friendly.
Overall, investor appetite for automotive loans and bonds remains in line with 2018. Some investors may play the waiting game because they know that large issuers are likely to be in the market more than once a year, but automotive loan issues have been oversubscribed over the past 12 months.
Will the auto sector shift gears in 2020?
Although refinancing looks set to continue dominating loan and bond activity, we may see more M&A issuance from the multinationals and companies in the automotive supply chain during the next year.
Just before Christmas 2019, Fiat Chrysler and Peugeot owner PSA announced a US$50 billion merger to form the world’s fourth largest carmaker by volume and third largest by revenue. Large automotive companies have been nervous about pursuing megadeals with each other as transactions have not always delivered in the past. However, developing and producing electric and autonomous vehicles is an expensive proposition. Manufacturers are expected to consider M&A to build economies of scale and share costs.
The transition from fuel to battery-powered cars will also affect supply chains, with many suppliers feeling pressure to consolidate, requiring financing.
It will also be interesting to see whether there is an uptake of alternative funding sources, to the syndicated loan and high yield bond markets. Automotive groups have access to diversified pools of finance beyond the debt capital markets and they are willing to explore their options. For example, Porsche tapped the Schuldschein market in 2019 to raise €1 billion.
The Porsche Schuldschein deal is also interesting as it was the largest ever 'green' Schuldschein loan, and the first of its kind by a car manufacturer. The proceeds from the raise will be used exclusively to fund Porsche’s first electric sports car.
A growing pool of investors want to invest sustainably, and bankers and automotive companies are seeking 'green' finance to fund vehicle electrification projects. Time will tell whether this gains traction, as the sector has had challenges with emissions. Companies have work to do to meet sustainable finance criteria, but an opportunity is emerging.
