Winner: BMW

This month's awards for the most innovative and mould-breaking deals in the credit market go to BMW for its EUR1 billion bond, Calyon's convertible and KfW's rouble issue

BMW's seven-year EUR1 billion fixed-rate issue provided some much-needed sustenance to an investor base hungry for corporate credit as the New Year got under way. Investment-grade corporate deals had been extremely thin on the ground in January, and BMW was the first non-financial issuer to hit the markets. As such, the German car maker set a strong precedent, with the deal coming in at tight pricing levels with an order book that was well diversified.

The bookrunners opened the order book on the deal at 8am on January 9, and by lunchtime had already received some EUR3 billion of interest from investors quick out of the blocks.

This huge interest enabled the company to upsize the issue from the original EUR750 million target to EUR1 billion, and by 3pm the deal had already been priced, coming in at the tight end of expectations, at 20 basis points over mid-swaps. That's just one basis point wider than the last BMW fixed-rate issue in July 2006, a five-year deal priced at 19bp over mid-swaps.

"It is quite rare to find an A1 rated company in the auto sector," says Jeff Tannenbaum, director on Merrill Lynch's European syndicate desk in London, which sold the deal along with Citigroup, Commerzbank and UBS. "The brand name epitomises quality. And investors like the discipline that BMW has shown in the past in accessing the market." He adds that market conditions were strong in early January from a technical point of view, a fact that encouraged the underwriters to go ahead as the first corporate deal of the year. "We were seeing little supply and large pools of money looking to be invested, which convinced us to go ahead as the first to tap the market this year," he says.

Investor interest was spread across Europe with more than 50% being placed in Germany, the UK and France, and the remainder split between a range of European banks, trusts, insurance companies and asset management accounts. Being the first issuer to break the ice in the New Year did require a certain amount of nerves, says Norbert Mayer, director of corporate finance at BMW in Munich.

However, the car maker, rated A1 by Moody's, was able to leverage off its strong reputation in the market to push through the deal at very attractive pricing levels.

"The decision to front-run the market was part of our overall strategy," says Mayer. "We felt that the lack of supply in the market could work to our benefit, so we took the risk and it paid off." Unlike the vast majority of the autos sector, BMW has managed to keep a strong reputation in the credit markets, which has been supported by a discerning issuance policy.

"We work the market infrequently," says Mayer. "Investors like the fact that we are not overloading the market with volume. It gives the paper a scarcity value."

The deal's success encouraged one or two other financials to follow BMW's lead and issue in the following days. Rabobank, one of a small handful of European banks with a triple-A rating, benefited from New Year demand, achieving its tightest ever pricing on a 10-year deal with EUR3 billion of fixed-rate paper issued at five basis points over swaps.

Issuer: BMW
Date of Issue: January 9, 2007
Bookrunners: Citigroup, Commerzbank, Merrill Lynch, UBS
Total size of deal: EUR1 billion
Maturity: January 2014
Coupon: 4.25% fixed rate annual, 99.360 mid-swaps + 20bp yield
Rating: Moody's A1 (stable), S&P A+ (stable)

BUYERS' VERDICT

Investors returned to the credit markets following the holiday season with a healthy appetite for new deals. BMW seems to have gauged the demand levels accurately, gaining an advantage as the first corporate to issue a fixed-rate deal this year.

"Being first in the market helped the issuer," says Douglas Jones, managing director of investment-grade fixed income at AIG Global Investment Group in London. "We like the BMW name and this particular deal looked competitively priced relative to some of the other issues in the market."

Investors seem to have been particularly enthused by the current BMW issue, which gave a couple of basis points' pick-up over previous issues, as a relative value play over earlier deals by the company. The previous BMW issue was the 4.125% January 2012, which was trading at around Libor + 13.6bp when the new bond came to market. The Libor + 20bp price on the new issue meant that investors were able to gain six or seven basis points by switching out of the older deal.

Furthermore investors were keen to access the deal due to its relative cheapness compared with the credit default swap on the same name. "The deal priced quite attractively against other BMW bonds and where it is trading in CDS," says Jones. "Not only was it cheap versus Libor, but the new issue also looked cheap versus the CDS which was trading at 12/16, so we were able to pick up a few basis points there too."

RATING AGENCY VIEW

The rating agencies see BMW's luxury automobile franchise as one of the strongest in the market. Standard & Poor's highlights the group's conservative financial policy and its robust earnings and cashflows, which have allowed it to emerge unscathed from the problems affecting much of the autos sector, in particular in the US.

Despite strong competition from other car manufacturers, BMW has benefited from concentrating on the premium segment; it stands in very select company as a European car and motorcycle manufacturer focused on the high end of the market.

"The group continues to generate above-average profit margins for the industry and satisfactory overall earnings and cashflows," notes Barbara Castellano, credit analyst at Standard & Poor's in Milan. "BMW is expected to be able to sustain its favourable market position in the medium term, despite the difficult economic environment in its main markets," notes Barbara Castellano, credit analyst at Standard & Poor's in Milan.

Both S&P and Moody's also highlight the strong liquidity and financial flexibility of the company, which have enabled it to tap funding sources as diverse as commercial paper, international bond programmes and securitisations. However the rating agencies also note that the group's niche positioning and competitive pressures in the automotive industry limit the potential for a rating upgrade.

Credit says...
BMW's seven-year fixed-rate deal was still the only corporate deal issued well into January. That's not to say it doesn't deserve the accolade as Credit's Deal of the Month for other, more worthy reasons: the company stands out in the troubled auto sector as a name resounding with quality and careful financial control. Given the absence of supply in the market, and the strength of the company name, it is no surprise that a huge wave of demand greeted BMW's foray into the debt markets in January.