Highly commended: Porsche

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German sports-car maker Porsche, famed for its high-speed Boxsters and 911s, tapped the capital markets by issuing a three-part deal in two currencies, one part of which was a record-breaking hybrid issue. The deal, issued in late January, included two euro-denominated tranches: EUR1 billion of five-year notes and EUR1 billion of 10-year notes. But it was the third tranche that set tongues wagging, a US dollar-denominated hybrid. At $1 billion, the issue is the largest ever unrated perpetual bond from a corporate in any currency. It also marked the first ever unrated US dollar perpetual.

The hybrid's coupon language attracted the most attention from investors: the perpetual has a non-call five-year feature with no step-up clause if the bond is not called after the fifth year, for which investors were compensated with a high coupon of 7.2%. Jeff Tannenbaum, director on the syndicate desk at Merrill Lynch in London and sole bookrunner on the hybrid tranche, says: "We thought there would be good demand from the global investor base for this type of product due to the rarity of the name and the ability to pick up yield by moving down the capital structure." He adds that the deal was specifically targeted towards Asian and European retail and institutional investors, excluding the US due to regulatory purposes.

The order book for the hybrid tranche was oversubscribed by more than four times with 280 retail and institutional investors partaking in the deal.

Tannenbaum says the funding exercise has two main purposes: to replace the strategic liquidity reserve which had been used to fund a stake in the Volkswagen acquisition and to strengthen Porsche's balance sheet by raising subordinated debt. Henrik Hanche, treasurer of Porsche, concurs: "Since it's a perpetual, it really fits our long-term financing."

At the same time, Hanche says the debt will further build on the company's strategic liquidity reserve. "The investments will be highly diversified, and we are targeting various asset classes, styles and asset managers." Rather than tapping into bank loans, which Porsche did in the late 1980s and early 1990s, Hanche says they currently have around EUR3 billion in cash, including the debt raised from 2004's private placement, to put to work.

Issuer: Porsche AG
Date of issue: January 23, 2006
Underwriters: Merrill Lynch, sole dollar bookrunner; Merrill Lynch, Barclays Capital, HVB, joint euro bookrunners
Tranches: $1bn perpetual, 7.2% coupon; EUR1bn five-year, 3.5% coupon equivalent to 27bp over swaps; EUR1bn 10-year, 3.875% coupon equivalent to 47bp over swaps
Ratings: unrated

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BUYERS' VERDICT

Christoph Klein, CPM

Asian and European investors jumped at the opportunity to get involved in the latest Porsche deal, with both the dollar-denominated hybrid and euro-denominated tranches oversubscribed.

Christoph Klein, portfolio manager at Credaris in London, says the hybrid structure was driven by a liability-matching requirement. "Porsche said in their investor presentation that this type of instrument was favoured in the funding of long-term US liabilities and was the motivation behind the dollar-denominated perpetual bond."

Klein says his firm looked at the hybrid deal for both diversification and income but stresses the importance of focusing on the coupon language. "This has added diversification to the range of hybrids currently available, as it is the first from a car producer. We also liked the cumulative coupon language: if the issuer misses a coupon then it has to be paid at a later period," he says.

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RATING AGENCY COMMENT

Porsche has upheld its unrated credit rating status for over five decades. This is partly due to its majority family-run ownership, according to Emmanuel Bulle, director in the European industrials team at Fitch Ratings in Paris. "There are some companies not willing to give any information or comments to the public and Porsche is a good example of that," says Bulle. Regardless, Bulle says Porsche remains an attractive credit from a bondholder perspective because of its strong name recognition.

CREDIT SAYS... Porsche impressed the credit market by bringing the first ever unrated US dollar perpetual to European and Asian investors. The transaction also allowed Porsche to diversify its investor base after issuing a US private placement in 2004. Despite questions surrounding the automaker's unrated status, high-grade investors flocked to all portions of debt as a result of the issuer's strong global brand recognition.

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