German car manufacturer BMW is no stranger to the euromarket. One of the most blue-chip issuers in the eurozone, BMW’s name is both well known and well regarded. It was even able to launch a €1.25bn Eurobond in the teeth of the financial crisis – November 2008 – albeit at a coupon of 8.38%.
Market conditions were still tough in mid-2011 and even seasoned issuers were reluctant to test the market, as the Greek crisis spluttered on and worries intensified over Spain and Italy’s ability to pay back their debt. Nonetheless, on Friday July 22, BMW launched a €1bn, 6.5-year bond, priced at 99.73% and carrying a coupon of 3.63%.
As Raoul van der Meeren, head of capital markets at BMW, explains: “We look at the market every day and we thought this would be a good opportunity for a deal before the summer break, especially for a benchmark deal."
Intelligent timing
The timing was no coincidence. The company had been communicating with bookrunners Crédit Agricole CIB, Deutsche Bank, JPMorgan and Morgan Stanley on a daily basis, discussing strategy and gleaning intelligence about investor appetite.
Even though conditions were difficult, BMW could have come to market at any point in July, but it wanted to choose the best possible moment. Late on Thursday July 21, European leaders finally reached agreement on a bailout package of sorts for Greece. On Friday morning, market sentiment was markedly improved, BMW’s credit rating was upgraded by Moody’s from A3 to A2 and the company decided to act. Even so, it was clear conditions were far from benign.
“The experience this time was certainly different. Some in the market questioned us about whether we should come to the market and we were more cautious than normal with volume and pricing,” says Mr van der Meeren. “We left a little bit more of a new issue premium on the table – about 8 basis points [bps], which is more than normal for us, although less than other borrowers might,” he adds.
Deal to shout about
BMW also chose to adopt a slightly different strategy to the book-build. Typically, the new issue process starts with ‘a whisper’ – when bookrunners let investors know a deal may be on the way. This allows lead managers and issuers to gauge investor opinion, while pondering the size, tenure and pricing for a deal. Following this, guidance is issued to the market; when bookrunners inform investors a transaction is about to be launched for a given amount and at a given price range.
This time BMW decided to skip the whisper phase and move directly to guidance. “We started with guidance because we wanted to send a clear signal to the market that we were going to do a benchmark deal and we had the confidence to go through with it,” says Mr van der Meeren.
We started with guidance because we wanted to send a clear signal to the market that we were going to do a benchmark deal and we had the confidence to go through with it
The strategy worked well. On July 22, bookrunners hit the phones at 7am London time and 8am continental European time, the books opened 30 minutes later and less than an hour later, orders had been received in excess of €3.5bn.
“It was really noticeable that there had not been a substantial deal for three weeks. A few months ago, typical order sizes were €50m. On this occasion, institutions were putting in for €75m and we had close to 300 investors putting in orders,” says one banker close to the deal.
Appetite also allowed BMW to price its deal at a spread of 78bps over mid-swaps, against guidance of 80bps to 85bps. “We could have increased the volume, but we did not want to tighten the price and increase the volume at the same time. We are quite a price-sensitive borrower, we kept the deal at €1bn and tightened the price,” says Mr van der Meeren.
Broad appeal
As a frequent borrower, BMW was also keen to issue a deal at the right maturity; a tenure that would appeal to investors and one where existing issuance was in short supply.
“We follow our deals quite closely as this gives us a good indication of pricing. We also look at which maturities are drying up and we try to issue bonds along the curve,” says Mr van der Meeren.
At 6.5 years, BMW's latest bonds were particularly appealing to insurance companies and pension funds. BMW and its bookrunners were also forced to allocate paper selectively, given the huge over-subscription, and the final book was described as 'very solid'.
Allocating bonds in such circumstances can be a diplomatic challenge but the process was carried out as speedily as possible, in light of persistent market volatility. By lunchtime, the transaction was wrapped up and in the afternoon, a bout of nervousness set in and the markets effectively closed again. As Mr van der Meeren says: “We thought our deal would open the door for other companies but sentiment turned and no one followed us.”
Despite the environment, the price of this latest issue has remained stable in the secondary market – testament to the borrower’s reputation and the judgement calls of both the issuer and its bankers.
