By Alex Clelland
LONDON, Aug 29 (Reuters) - German automaker Volkswagen launched a larger than expected 1.5 billion euro deal on Thursday in its biggest ever single-tranche bond sale, the lead managers said.
Bankers said other corporate issuers would monitor the transaction, which re-opened the European corporate bond market after a traditional summer lull, and use it as a barometer to decide whether to follow Volkswagen.
The new bond, managed by Barclays Capital, Commerzbank Securities and SG Investment Banking, matures in March 2008 and was priced to yield 65 basis points over the swaps curve. This is at the tighter end of the 65 to 70 basis point range indicated before the sale.
Dealers said the new bond outperformed the auto sector on Thursday. The yield fell to 64 basis points over swaps by 1410 GMT, while yields rose on bonds of its peers. Bond yields rise as prices fall.
"It was more than twice oversubscribed. There was broad international distribution with more than 60 percent of the deal placed outside Germany, mainly in France, the UK, Benelux and Italy," said a syndicate official at one of the lead managers.
"They've got a faithful following among European investors in a market that is slowly improving. I think this is a sector they are willing to get their hands dirty with again."
VW was also one of the first automakers to tap the markets in January 2002, selling three and 10-year bonds at 23 basis points over swaps and 48 basis points over swaps. Bankers said these bonds were aggressively priced and have performed poorly compared with European peers.
Volkswagen took to the road to market this transaction, however, which it did not do for the January deal. Bankers said its sales pitch had paid off.
"It was, from my point of view, expensive, but other bonds VW had in the same maturity sector actually performed relatively well, so from that point of view it's a successful deal," said Richard Hodges, senior fixed-income manager at Gartmore, who did not buy the new bonds.
EUROPEAN AUTOS SAFER BET THAN U.S.
Bonds of European automakers, which with the exception of Italy's Fiat , carry higher credit ratings than the Big Three -- Ford Motor Co , DaimlerChrysler and General Motors -- are much in demand, but supply of such debt is short. Consequently, they trade at a lower yield than bonds of the heavily-indebted Big Three.
Yields on bonds of the Big Three automakers have see-sawed this year as uncertainty over the outlook for the U.S. economy called demand for their products into question.
While such volatility could offer higher overall returns if a sunnier economic outlook emerges, bankers said Volkswagen offered investors a relatively safe haven.
"For those investors looking for exposure to the auto sector outside of the Big Three, or for a more stable, lower Beta (less volatile) stock, we would recommend the new issue," said Bear Stearns credit analyst Victoria Whitehead in a note to clients.
Credit rating agency Moody's Investors Service rates Volkswagen Financial Services AG A1, while rival Standard & Poor's rates the company an equivalent A+. Both agencies assign a stable outlook.