Daimler steers clear of volatility with early issuance

Daimler Group is one of the world’s largest manufacturers of cars, vans and trucks. Best known as the name behind Mercedes Benz, Daimler makes more than 2.5 million vehicles a year and runs Daimler Financial Services, providing financing and mobility services to customers. It is this division that requires frequent access to the capital markets.

“We are in a net cash position on our industrial side, so the funding we are doing is pretty much exclusively for our captive finance activities,” says Peter Zirwes, global head of corporate finance at Daimler.

In 2015, Daimler raised the equivalent of €17bn in the markets and in the third quarter of the year, it began to consider funding requirements for 2016.

“We pencilled in a euro issue for the beginning of the year, since we felt that some front-loading would be a prudent strategy.  Typically, investors start the year with a blank sheet of paper and significant liquidity, so they have to put their money to work. That was certainly true this year. We decided therefore that we should be prepared to enter the market at a very early stage,” says Mr Zirwes.

Broadening its base

Germany has three major car manufacturers: Daimler, BMW and Volkswagen (VW). Widespread belief that VW, with its well-publicised problems stemming from its admission that it cheated on emissions tests, would need to tap the euro market for funds was also behind Daimler’s rationale to come to market early.

“When you look at the pricing of our bonds, it is clear that we have differentiated ourselves from VW. Nonetheless, we are following the situation closely and have to bear it in mind,” says Mr Zirwes.

Daimler also had to consider that, even though investors are awash with cash, sentiment is unpredictable. As the group was keen to issue in size, it chose to work on a three-tranche transaction to appeal to a wider range of investors. “Our aim was to do a sizeable transaction, which means we wanted to raise more than €2bn. In order to do this in the most efficient way you need to have the broadest investor base you can get and balance it with the funding objectives you have,” says Mr Zirwes.

Typically, Daimler issues bonds in maturities of up to five years, but this time it included an eight-year tranche as well.

“We usually access the market at the shorter end, but we are also open to the longer end because it is prudent as part of our overall liquidity management. Eight years seemed to be the sweet spot for investors because of the extra spread that it offers,” says Mr Zirwes.

Ultimately, Daimler went for three-year, five-year and eight-year tranches, further broadening the investor base by offering the shortest tranche as floating-rate notes (FRNs). Structuring the deal in this way involved close collaboration with the transaction’s bookrunners: Commerzbank, Deutsche Bank, ING and SG CIB.

“When we pick our bookrunners, we need to be confident that they are in a position to deliver and place our bonds in solid hands. And particularly in these challenging markets, we look for bankers with a strong grip on the market, who can give us a good read of current conditions, provide good advice and convey our story to investors,” says Mr Zirwes.

“We also have to manage our banking relationships so this played a part in our decision-making process too,” he adds.

Timing is everything 

Daimler was keen to move early in the new year, but the first trading day in Europe – Monday, January 4 – was marked by falling prices and growing concerns about China.

Day two was slightly different.

“The fixed-income market had a positive tone first thing on Tuesday. I always try to put myself in the position of investors and imagine how they might see the market and that morning I felt they might think it was a good time to invest,” says Mr Zirwes.

Daimler duly launched its transaction, initially marketing a three-year FRN at a spread of 65 basis points (bps) over Euribor, a five-year fixed-rate tranche at 75bps over mid-swaps and an eight-year tranche with a 90bps spread. The decision to go ahead was brave, as sentiment was hard to read. However, it proved to be the right move.

“We were the only corporate issue out there so we had the full attention of the market and the response was really quite remarkable. The orderbook developed really well, not just in terms of size but also in terms of depth. There was really good momentum and the book read like a 'who’s who' of European blue-chip investors,” says Mr Zirwes.

Initially, Daimler was targeting a total fund-raise of €2.5bn, but within an hour the orderbook topped €3.5bn and an hour later, orders of some €5bn had been received. “This allowed us to tighten the pricing quite aggressively, but interest was maintained, which was very gratifying. When the books closed, there were more than €7bn of orders,” says Mr Zirwes.

Daimler then increased the issue to €3.25bn, comprising a €1.25bn FRN at 53bps over Euribor, a €1bn five-year tranche at a spread of 65bps and a €1bn eight-year tranche with a 77bps spread.

The group’s timing proved even more propitious in hindsight. Market conditions began to deteriorate that very afternoon and remained difficult for days afterwards. “It is never easy to make that final decision to go with a deal but we felt it was the prudent thing to do and we definitely benefited from launching then,” says Mr Zirwes.