Prominent key takeaways from the conference include:
A challenging environment
The spread of the Coronavirus provided a number of challenges for the automotive sector. Supply chain disruption and the shortage of semi-conductors had a tremendous impact on the industry and made 2020 a difficult year for automakers. In light of this, many original equipment manufacturers (OEMs) shifted their production towards high-end luxury cars that would provide a higher profit margin. This approach turned out to be quite successful in mitigating revenue loss. Although we see markets currently recovering, there is still a lot of uncertainty with regard to China due to their strict COVID-19-policies. Additionally, automotive stocks have been impacted by the changing macroeconomic situation including: rising interest rates together with increasing prices for raw-material and energy, resulting in higher inflation rates and creating a tough environment for the automotive industry.These trends have also affected capital markets, with the M&A and debt capital markets activity currently below historic average. Equity capital markets value on the other hand is above historic average in 2022, despite lower deal activity, though this is mainly driven by a few notable IPOs. The automotive industry was also impacted by the adjustment of interest rates, with automotive loan activities seeing increased yields. There has been a number of De-SPAC transactions in the mobility sector, with convertible bonds/rights issues potentially increasing next year.Given these circumstances, panelists do not expect the market to reach pre-crisis level before 2024.
Electrification and digitalisation
One major development for the coming years is the shift from combustion engines towards electrification. This shift brings with it a high demand for financing, not only relating to the vehicles themselves, but also the infrastructure needed for the transformation towards sustainable transportation. However, panellists noted that electric vehicles are not likely to be the endgame, with hydrogen being a promising addition to future driving technologies.
Electrification goes hand in glove with digitalisation and the increasing interconnectivity of vehicles – this includes not only the growing popularity of car leasing and subscription services, but also other related digital services. For example, we might see business models that allow customers to book car insurance for travelling abroad online while they are on the go. These potential technological advances require high research and development costs and a related need for financing. The increasing complexity of these technologies needs to be taken into consideration when structuring the financing of such business models.
More openness for different asset classes
After the financial crisis in 2008, legislators implemented increased regulation on capital markets, which greatly affected automotive financing activity. Despite increased regulations, auto loans and leases are still a favourable asset class due to high underwriting standards and the given granularity. It is worth noting that our panel observed that there is a growing openness of banks for new assets classes.
New directives on the horizon for tax
From a tax perspective, our panel remarked that we still see Luxembourg Special Purpose Vehicles (SPV) being frequently used in automotive financing transactions. However, a German SPV is typically only advisable under certain conditions, particularly in transactions that involve a servicing component and therefore involve a high permanent establishment risk. In these instances, the use of a German SPV might be beneficial to avoid any tax or regulatory risks.
Our panel also stated that German fiscal authorities are currently focussing on VAT aspects, especially on input VAT. The assessment of such VAT-related questions typically takes fiscal authorities quite some time – accordingly, appropriate bridge financing might be advisable.
With respect to the EU, panellists examined the issues arising from the interest barrier rule under the Anti-Tax Avoidance Directive, as well as the possible impact of the Anti-Tax Avoidance Directive III that we currently see on the horizon. The latter directive is currently in draft, proposed by the European Commission. The directive aims at prohibiting the misuse of shell companies for tax reasons. However, the draft directive includes an exception for SPVs that are used for securitisation transactions within the confines of the Securitisation Regulation. This directive is scheduled to enter into force in 2024, and is definitely one to keep an eye on.
Think big and build a network
Our panel also discussed the key challenges for start-up companies to obtain financing, not only in the automotive sector. They had two pieces of advice: think big and build a network. Think big is not just with respect to the individual business model, but also keeping in mind the internal organisation and data structuring of the company, as a defined processes for these matters makes it easier to convince banks to provide financing. In addition, a network of high level contacts facilitates introductions with key decision-makers to help negotiate desirable outcomes.
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Authored by Dietmar Helms, Michael Schlitt, Heiko Gemmel, Anna Rogge, and Felix Ackermann.