VW, BMW are paying much higher rates for debt

The average yield on European automaker bonds has climbed to 4.15 percent, essentially a measure of how much it would cost the industry to sell new notes, according to a Bloomberg index.

That is about twice the interest rate that companies are paying on existing debt, currently at 2.14 percent, the data show.

BMW’s lending arm, BMW Finance, recently issued 2 billion euros of bonds with coupons of between 3.25 percent and 3.625 percent. That compares with fixed-rate euro bonds coming due this year with coupons of at least 3 percentage points less than the new ones, implying an extra 50 million euros cost per year, according to Bloomberg calculations.

The broader question for the industry is whether consumers will be able to afford costlier car loans with inflation already eroding incomes, or if they will opt to drive older vehicles for longer and delay new purchases.

Some analysts have speculated that automakers may choose to keep interest rates low, even if it erodes the profitability of their financing units, in hopes of making up the difference with higher sales.

So far, consumers have been resilient despite faster inflation.

The backlog of orders that automakers built up during the pandemic has made for solid quarterly results as supply chains normalize, with auto sales in Europe rising for nine months straight.

But demand has shown signs of waning in the region’s economic powerhouse – domestic orders at German automakers fell 30 percent in the first four months of the year – and analysts say companies are bound to lose some of their pricing power.

“Higher funding costs absolutely impact profitability at auto companies’ financial arms,” said Bloomberg Intelligence credit analyst Joel Levington.

“Auto manufacturers will need to decide how to work around affordability. Do they give up pricing, add incentives or offer cheap rates as mechanisms for purchasing a vehicle?”