Gearing up: Debt IR at BMW
Nathan Kohlhoff says he was never this busy as an equity analyst. The former banker joined BMW last year as debt spokesman for its IR team. Since then, he has been at the forefront of a major overhaul of the group’s debt IR program.
‘I’m still relatively new here at BMW and there are a number of areas to get up to speed on,’ says Kohlhoff of his hectic schedule. ‘And then we’re looking to extend our efforts on the debt side. That’s also taking up some time.’
BMW decided to upgrade its debt communications two years ago. The car manufacturer’s borrowing had increased substantially as it grew its financial services business, which provides car leases. This led Erich Ebner von Eschenbach, BMW’s group treasurer, to call for a stronger debt presence in the investor relations department.
His cause was boosted by the arrival of the banking crisis and ensuing credit squeeze. ‘The crisis confirmed the value of our increased emphasis on debt investors and also assisted us in accelerating our efforts to firmly establish debt IR as part of our overall financial commu-nications strategy,’ explains von Eschenbach.
BMW’s total debt stands at around €80 bn ($111 bn), including €60 bn of financial liabilities, giving the group a debt/equity ratio of about four. Of this total, typically €20 bn to €30 bn matures each year, handing the firm a real incentive to streamline its debt communications.
The changes made so far have led to close collaboration between investor relations and the treasury department. In one example, the treasury team held a series of discussions in collaboration with IR to nail down what makes debt investors tick. To aid this process, direct feedback was gathered from fixed-income professionals on the buy side and sell side.
‘Debt investors don’t look at market capitalization,’ comments von Eschenbach. ‘They look at things like leverage, free cash flow, how likely it is that interest and principal payments will be made and the flexibility of a company’s funding structure. Debt IR has to understand the metrics debt investors are focused on.’
Close collaboration benefits the treasury, too, points out von Eschenbach, who relies on the IR team to provide a market view of his funding plans.
‘I rely heavily on the knowledge of our IR and corporate finance departments in determining our funding strategy,’ he notes. ‘The feedback from IR tells us which investor groups are interested in specific debt products. Solely relying on our banker’s market view has proved not to be particularly advisable.’
Kohlhoff, like many others in IR, is adapting to the increased focus of investors on debt. He was a sell-side analyst for seven years covering the automotive sector, most recently at German bank HypoVereinsbank, which is owned by UniCredit, and had a good knowledge of traditional IR directed toward equity investors and analysts.
He was, however, far less familiar with ‘the separate dynamics of debt investor relations,’ as he describes them. ‘The opportunity to specialize in debt was one of the reasons I was so excited about joining BMW,’ he points out.
His chance came when the group decided it needed a debt spokesman in its IR team. The car maker hands each member of the department specialist areas of responsibility, covering areas such as sustainability, the AGM, industry trends and accounting. Kohlhoff got the new debt beat.
He notes that all IR professionals need to have some understanding of debt and related credit ratings. ‘We’re seeing a lot of overlap now between the interests of debt and equity investors,’ he says. ‘Previously, markets were mainly focused on the industrial business of making cars, and nobody was particularly concerned about financial services. Now that picture has completely changed, especially for the equity side.’
A new survey by Thomson Reuters backs this trend. It finds IR professionals are becoming increasingly responsible for fixed-income issues, spending more time with debt investors and adjusting their communications to focus more on funding activities and asset quality, rather than the growth story.
Notably, the survey finds the number of IROs with primary responsibility for fixed-income issues has almost doubled in the last two years, from 19 percent to 36 percent (see Primary responsibility for fixed-income issues, above). Corporate treasurers remain the main source for fixed-income issues, according to the study.
Thomson Reuters also finds greater interaction is taking place between treasurers and IROs – again, much like what is happening at BMW. ‘We expect this relationship to grow, with their roles complementing each other, the former at the source of the funding while the latter communicates management’s funding decisions to the investors,’ writes Simon Tse, author of the report.
The survey’s findings suggest the financial crisis has bolstered the visibility of the IRO in public companies.
Despite BMW’s increased emphasis on debt IR, however, the outlook is still tough for the car maker. Last November the group’s credit rating was cut, and market conditions remain tricky. For von Eschenbach, the success of his project can be seen in BMW’s continued ability to execute private placement deals and bond issues, drawing on relationships with investors and partner banks built in less volatile times.
‘If you meet debt investors on a regular basis, you have a good idea of what’s going on. And we meet the big global players pretty frequently,’ he explains. ‘You need to maintain a constant dialogue, even if you don’t have a deal. The window for a deal is typically very short and you need to be able to react quickly and speak to all the relevant parties. You continually need to make sure there is an awareness of the credit quality of your firm.’
Debt IR do’s and don’ts from BMW
- Maintain transparent communication on your credit and funding strategy
- Have a consistent and well-defined IR strategy, taking the interests of debt and equity investors and analysts into account
- Have regular contact with investors at both management and IR level
- Know your investors – understanding investor preferences enables you to provide what investors are looking for. Plus, you gain valuable insight for your treasury department.
- Neglect debt investors – for many companies, including BMW, debt outstanding is significantly higher than the market capitalization
- Ignore the rating component of debt IR – debt investors are keen to gain insight into the ratings side of the credit story
- Take the debt capital markets for granted – you never know when access to these markets might be restricted or altogether inaccessible. This is why it’s important to establish relationships with your investors and to have a diversified funding structure.