The lack of a rating failed to prevent massive retail interest in the auto maker’s assortment of bonds, writes Edward Russell-Walling.

Drivers love the cars – and investors positively adore the stock. For Porsche, which recently came to market with three large bond issues, these two facts are not unconnected.

And if Porsche did not feel obliged to have the paper rated, well, the world’s most profitable car maker can afford a touch of arrogance.

Porsche has been in the news in recent months thanks to a boardroom wrangle with Volkswagen. VW’s chairman is Ferdinand Piëch, whose family controls Porsche, and Porsche is now a key shareholder in VW, having spent more than €3bn on an 18.5% stake.

Some think this creates an unacceptable conflict of interests, though Mr Piëch has agreed to step down next year. Be that as it may, the share purchases wiped out Porsche’s comfortable cash cushion – it previously had net cash of €2.4bn – and it wished to rectify the position.

“With our conservative approach, we want liquidity on the balance sheet,” says Porsche chief financial officer Holger Härter, who will join his chief executive Wendelin Wiedeking on the VW board in May. “We had one bond run out last year [DM500m – €255m – seven-year 4.5%], and another one [€300m five-year 5.25%] is due to run out in 2007. With the interest rate situation as it is at the moment, we can refinance the existing bond at a lower rate.”

High demand

The company has certainly been able to do that, taking advantage of demand and low rates to sell two separate tranches of €1bn each into an eager market. One has a five-year maturity and a coupon of 3.5%. The other is 10-year paper paying 3.875%. Orders worth €7bn were received from over 550 accounts, and the pricing was the tightest ever achieved by an unrated issuer, according to global coordinator Merrill Lynch and joint bookrunners Barclays Capital and HVB.

Making history

Porsche earned another place in the history books with a separate dollar-denominated deal, which formed part of the whole financing package. This was a $1bn hybrid capital issue, the first ever by an unrated company.

Why no rating? “The Porsche brand is very well known worldwide,” Mr Härter explains. “It has a solid balance sheet, and a rating has not been necessary so far. The company is not a regular issuer, and always gets the best terms, comparable to the best-rated auto companies.”

The lack of a rating will have made both types of bond impossible to buy for some investment mandates. And some investors stayed away from the benchmark Eurobonds because they felt the pricing was too tight. But that didn’t keep the hordes away from the roadshows, lured, in many cases, by the glamour of the name. Once there, they were clearly impressed by the story Porsche had to tell.

Asian eyes

While the Eurobonds were targeted squarely at the European market, the hybrid capital issue roadshow started in Asia, where the Porsche name is much admired. “Demand in Asia was very high,” says Mr Härter, noting that a healthy share of that came from retail accounts.

The hybrid issue was sole lead-managed by Merrill Lynch. As a perpetual non-call five-year bond with no step-up clause, it qualified as 100% equity under IFRS. “It was very cheap equity, and the coupon payments are tax deductible,” Mr Härter says. “It maintains our equity ratio in the balance sheet and, being perpetual, gives us a natural hedge position, allowing us to hedge our dollar exposure.”

The retail interest allowed pricing to be keener than it might otherwise have been. With bids of more $4bn, the coupon was tightened from a guidance of 7.5% to 7.2%, or swaps plus 140bps. That compared very favourably, from the issuer’s point of view, with the trading levels of most other corporate hybrid bonds.

Quality material

Not long after the issues were successfully concluded, Porsche reminded investors why its paper is quality material. Announcing its provisional mid-year figures, it revealed record pre-tax profits and a near 17% increase in vehicle unit sales. In spite of the cost of developing the Panamera sports coupé (to be launched in 2009), full-year earnings will again reach “a high level”, it said.

Sadly for those investors, Porsche is not planning to come back to market any time soon. Though there is an opportunity to refinance the Panamera programme out of the bond issue proceeds, the company generally funds capital expenditure out of its strong cash flow. “Actually, we see no need to return to the market in the next two to three years,” Mr Härter says.

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