Volkswagen to Get `Free' Capital From $4.2 Billion Bond Maturity
Volkswagen AG will have a 3.7 billion-euro ($4.2 billion) bond maturing next month -- but the debt’s structure means it won’t add to the crisis-stricken automaker’s financial headaches.
Holders of the securities due on Nov. 9 will be paid in VW shares instead of cash as the securities must be converted into equity. With the company’s shares hammered by an emissions-rigging scandal, investors may receive assets worth less than the original cost of the bonds.
The payment in stock instead of cash will come as relief to VW as it faces a multibillion dollar legal bill after admitting last month to fixing emissions tests in 11 million of its diesel-engine cars. The company lost as much as $33 billion in market value after the scandal broke and Warburg Research estimates damage to its sales and reputation may cost 35 billion euros.
“It’s like a ‘free’ capital increase,” said Jonathan Stanford, a Lugano, Switzerland-based fund manager at a unit of GAM Holding, which manages 124 billion francs ($128 billion). This is “bringing the company a welcome, albeit small, relief. The risk is that you might end up with a lot of stock that is not worth very much.”
Chief Executive Officer Matthias Mueller said this week VW will delay or cancel non-essential projects to slash spending.
The convertible bonds, which were issued in 2012, were quoted at 73 cents on the euro on Thursday, from 100.8 cents on Sept. 17 a day before the scandal erupted, according to data compiled by Bloomberg. The conditions of the debt remain unchanged, Claus-Peter Tiemann, a spokesman for VW, said by phone on Wednesday.
Volkswagen shares tumbled to a four-year low of 92.36 euros after the scandal broke and were trading at 106 euros on Friday. The spread between common and preferred stock widened the most since January 2009 with the common shares gaining as much as 15 percent on volumes about three times those of the daily average for the past three months.
If the company’s shares were to stay at current levels, owners of the bonds would suffer losses, said Brice Perin, a Paris-based fund manager at Generali Investments Europe SpA, which has 380 billion euros of funds under management.
Mandatory convertibles are commonly bought by hedge funds, which reduce the risk by short-selling the underlying stock, GAM’s Stanford said Thursday. Holders also benefit from high coupons the securities pay, he said.
The conversion may have an impact on some of VW’s investors, said Simon Oehri, a portfolio manager at LLB Asset Management, which holds some of the maturing bonds.
“The Volkswagen brand as well as its access to the bond market are hurt,” said Vaduz, Liechtenstein-based Oehri. “Future convertible or straight bond issues will be very deeply analyzed by the market.”
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