Carmaker Misery Is Dragging Down Global Credit Market Returns
(Bloomberg) -- Carmakers’ woes are turning into one of the global corporate bond market’s biggest pain points, with investors bailing out of the sector’s debt as vehicle sales stall and competition rises.
Most Read from Bloomberg
Dubai’s Allure to Expats Is Weighing on City’s Infrastructure
Mexico Seeks to Halve Permitting Time to Attract More Factories
One City’s Plan to Re-Link a Neighborhood That Robert Moses Divided
The total return of bonds issued by global car companies is on track for its biggest underperformance versus the broader high-grade market since 2019, according to Bloomberg indexes. In Europe, where multiple automakers including Stellantis NV and Volkswagen AG have issued profit warnings, carmaker bonds are set for their biggest underperformance in nearly a decade.
“Every time I see my end-of-day report, autos are weak again,” said Al Cattermole, a portfolio manager focused on credit at Mirabaud Asset Management. He’s been cutting exposure to car company bonds since June after being overweight on the group last year.
The sector has been hit on multiple fronts. In Europe, carmakers have been hurt by weakness in major economies like Germany, as well as slowing sales of their vehicles in China. In the US, car sales fell in the three months to the end of September as high prices and financing costs kept customers home. Stiff competition in electric vehicles and the threat of tariffs in major markets are added headaches.
The underperformance is a problem for the overall high-grade market. A Bloomberg index of global investment grade corporate debt has returned 0.49% since September, with automakers and components the only one of 26 sectors to have had a negative contribution.
And the drag from carmakers is exacerbated by the size of the sector: Autos are the largest non-financial group by face value, according to Bloomberg indexes. That means that when money managers want to reduce their exposure, they sell such a large portion of debt that it can be too high to absorb.
“It’s a big sector with several of the largest issuers. If people want to get underweight, a lot of paper comes out,” said Cattermole.
It’s tough to find buyers. Money managers have the biggest underweight positioning in European auto names in more than five years, according to Bank of America’s latest credit investor survey published this week, while the issues facing the sector have no quick fix.
“Going in to 2025, auto companies will have quite a lot of challenges and require quite a bit of action from companies to tackle,” said Nesche Yazgan, a credit analyst at RBC Bluebay. “On top of the funding cost challenges, you are looking at the ongoing investment in electric vehicles at very significant levels.”
The string of negative news in the sector in recent months has also led to a jump in the cost of credit protection for firms including Jeep and Dodge maker Stellantis, as well as Germany’s Volkswagen, Mercedes-Benz Group AG and BMW AG. Moody’s Ratings today changed its outlook on Stellantis to negative from stable, citing the severity of cash burn expected in the second half of 2024.
Automotive names also make up the biggest non-financial sector in the global junk debt market by face value. In contrast to the high-grade side, which is dominated by large, diversified car manufacturers, the junk space includes smaller firms making specific car parts, like ZF Friedrichshafen AG, the Schaeffler Group and Forvia SE.
Jean-Baptiste Champetier de Ribes, a credit research analyst covering the auto sector at Generali Investments, doesn’t expect to see a wave of rating downgrades for high-grade carmakers, especially as firms may still have a cash cushion left over from the Covid-19 pandemic, when they were able to raise debt cheaply.
Even so, few are ready to take big bets on the recovery of the sector yet. Among the signs of a turning point that investors mentioned are support by European governments for electric cars and a conviction that an economic slowdown can be avoided.
“We are underweight for now,” said Elisa Belgacem, senior credit strategist at Generali Investments. “We are not desperate as we don’t think it’s a dead sector. There will be a moment to come back.”
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.