November 6, 2012 / 11:20 AM / 7 years ago

UPDATE 1-Volkswagen convertible bond raises $3.2 bln

* Size increased from 2.0 bln euros due to demand

* Coupon set at 5.50 percent (Adds detail, background, comment)

By Andreas Cremer and Kylie MacLellan

FRANKFURT/LONDON, Nov 6 (Reuters) - Volkswagen has raised 2.5 billion euros ($3.2 billion) issuing a bond that will be converted into shares in the German carmaker in 2015, strengthening its balance sheet.

Mandatory convertible bonds, whose main investors are mostly U.S.-based and which are rare in Europe, can help a company protect its credit rating because they tend to be treated as equity by ratings agencies.

VW’s offering was increased from an initial 2 billion euros due to strong investor demand. One person familiar with the matter said on Tuesday it had been substantially oversubscribed.

VW said the bond, which will be converted into non-voting equity in 2015, will carry an annual coupon of 5.50 percent, the top end of an indicated 4.75-5.50 percent range.

The carmaker’s war chest, which topped 21 billion euros in September 2011, has been depleted this year by purchases including Italian motorcycle company Ducati, and Porsche sports cars.

During a conference call on Oct. 24, finance chief Hans Poetsch said VW was looking to maintain a cash reserve of about 10 billion euros. It had around 9.2 billion euros in September.

Singapore-based Bernstein analyst Max Warbuton said VW has been generating sufficient funds to meet the 10 billion euro requirement, and did not need the extra money from the convertible bond unless it planned more acquisitions.

VW may use the proceeds to top up its holdings in heavy-duty vehicle makers MAN SE and Scania as Europe’s No. 1 carmaker aims to beef up its truck operations, he said.


The terms of VW’s bond include early conversion in the event of being cut below a certain level by Moody’s or S&P.

It has a minimum conversion price of 154.50 euros, and a maximum conversion price of 185.40 euros representing a maximum conversion premium of 20 percent, the company said.

The deal is structured so that the higher VW’s share price rises, the fewer shares will be issued. If the share price falls below the minimum by the time of conversion, holders will get one share per bond, if it rises above the maximum they will get 0.83 share per bond, with a sliding scale in between.

Volkswagen shares were down 4.0 percent at 156.00 euros at 1115 GMT.

The convertible bond market has seen a resurgence this autumn. A rise in stock markets since early September has tempted more companies to issue and more than 20 convertibles have been launched in Europe.

The VW offering was run by Bank Of America Merrill Lynch, Credit Suisse and Deutsche Bank. ($1 = 0.7823 euro) (Additional reporting by Maria Sheahan Writing by Kylie MacLellan; Editing by Dan Lalor)

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