Volvo Car hits market sweet spot with green debut

By Eleanor Duncan

LONDON, Sept 30 (IFR)Investors showed up in strength for Volvo Car’s debut green bond, proceeds from which will support its strategy towards more electric cars and a reduction in greenhouse emissions.

Active bookrunners BNP Paribas, ING (B&D) and SEB launched the seven-year fixed rate note at 2.5%, cutting the yield from initial price thoughts of 2.875% area on the back of an over-€2bn order book. Guidance was 2.625% area.

The company, which is owned by Zhejiang Geely Auto Group, kicked off two days of marketing on Monday.

Bankers speaking prior to the deal’s launch said that Volvo’s Ba1/BB+ (negative/stable) ratings put it in a sweet spot of appealing to three groups of potential buyers: investment-grade investors looking for extra yield, high-yield portfolios and dedicated green accounts.

“Volvo is a classic crossover name,” said a banker familiar with the deal.

“It’s the higher end of the non-IG market, and we’re trying to target the IG guys who play in that space who, over the past few years have become not so much tourists, but having holiday homes in [the junk bond] space.”

Volvo laid out its green ambitions in a framework released last week.

The company is aiming to cut its lifecycle greenhouse gas emissions per car by 40% from 2018 to 2025. It also wants 50% of all its sales to be electric cars by 2025. And by 2040, Volvo wants to be completely “climate neutral”.

Funds raised under the framework will be earmarked for the research, development and investments related to electric cars and also to increase manufacturing capacity for batteries.

One high-yield investor said he was ignoring the green label, noting that money is ultimately fungible. He said he was being more cautious around auto credits because of the recent impact of coronavirus on the sector.

“OEMs [Original Equipment Manufacturers] are becoming a bigger portion of the overall high-yield bond market,” he said, pointing to the recent downgrades in the auto sector, including Ford and Fiat Chrysler.

“In these situations, the real focus should be on the business’s cash needs and production volumes. Investors shouldn’t lose sight of the situations and what refinancing needs are in the auto sector,” said the investor.

“There is always a risk associated with smaller-volume OEMs and Volvo is in that category. The balance sheet is in better shape but it’s in an industry that has huge research and development costs, and it’s harder to cover them when you have smaller volumes.”

CAR MAKERS TO THE FORE

Volvo is the third auto maker to land a bond in the green sector this month.

Volkswagen got a good response for its debut green bond on September 16, with its €2bn dual-tranche deal that was more than five times subscribed. And Daimler’s €1bn debut green 10-year saw more than €8bn of peak orders.

Both Volkswagen and Daimler priced well through fair value – although it was unclear how much of the demand was down to the green label.

Volvo’s bonds have held up fairly well through the tumult of the coronavirus crisis, thanks in part to the fact that the company is a fairly rare issuer, said a banker away from the deal. The new bond will extend the carmaker’s curve by around 2.5 years.

Its €600m 2.125% April 2024s dropped to 88.80 during the peak of March’s sell-off, but have since recovered to 99.40, according to Tradeweb data.

“They’ve had much less of a round trip than other auto manufacturers, and that’s in part because investment-grade guys own it and are happy to hold it,” said the banker away.

He compared Volvo to Ford Motor. US automaker and so-called fallen-angel Ford’s 2.33% November 2025s dropped as low as 57 bid in March, although have since recovered to 93.

Ford sold its first euro bond as a high-yield borrower on September 8, when it had to pay a double digit concession to access the market.

Volvo Car has visited the euro bond market three times to raise debt, most recently in March 2019, according to IFR data.

BNP Paribas was green structuring advisor.

(Reporting by Eleanor Duncan, editing by Helene Durand, Sudip Roy)

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