Renault is a strong BBB credit and a relatively rare issuer in the sterling corporate bond market. Yet despite last week offering an optically attractive premium to invest in a £250m 5yr transaction, they failed to ‘capture’ sufficient demand and were forced to cancel the deal. Such events are rare and hence noteworthy.
In recent months the global auto sector has come under increasing pressure from a multitude of headwinds. US tariffs on steel and aluminium alongside higher oil prices have led to increased input costs and lower margins. Higher interest rates, particularly in the US, are driving up the cost of finance for consumers and leading to concern about the future trajectory of sales volumes. Emissions related litigation and investigations in the wake of the Volkswagen scandal are ongoing. New emissions regulations and changing consumer preferences in Europe are increasing costs and depressing sales volumes, particularly of diesel cars. Evidence of a marked slowdown in the Chinese market, linked to reduced tax incentives and tightening consumer credit conditions, is becoming a cause for concern given that China has long been seen as an engine for growth.
Companies including Daimler, BMW and Ford, as well as auto-parts suppliers Continental and Valeo, have all issued profits warnings in recent months. Sector credit spreads have reacted accordingly with performance in the past couple of weeks being particularly poor.
Given that backdrop you would be forgiven for wondering why Renault chose to issue a new 5yr sterling bond. But why not? Absolute yield levels remain low and so attractive from a borrower’s perspective, even if they have to offer some additional spread to attract investor appetite. Common practice is for the initial price guidance to be revised tighter (i.e. more expensive from an investor’s perspective) once a solid order book is in place. Yet in this instance, demand was insufficient and instead the deal was pulled.
Despite choosing not to participate in the deal, it was still a surprise to see it cancelled. This rare event perhaps reflects not only the cautious stance of many credit investors towards the sector (given the multitude of headwinds highlighted) but also guarded risk appetite in the sterling credit market more broadly as Brexit uncertainty peaks.