Porsche Holding is the largest automotive distributing company in Europe. The company – based in Salzburg Austria – employs approximately 17,500 people across the group and had a turnover of close to €9 billion in the fiscal year 2005/2006, which ended on the 31^st of March. This month we speak to Jochen Stich, Managing Director of Porsche Corporate Finance GmbH – the finance company of Porsche Holding.

Porsche Holding is very distinct from Porsche AG the car manufacturer. Can you tell us about Porsche Holding and what the relationship to Porsche AG is, if any?

Porsche Holding is 100% family-owned by the families Porsche and Piech. There are common roots between Porsche Holding and Porsche AG going back to the time when both companies were founded.

Porsche KG was founded in 1947 and in 1949 the company was split into Porsche Stuttgart (now Porsche AG) and Porsche Austria (now Porsche Holding), which was responsible for the distribution of VWs in Austria. So there is one name, the same family shareholders, but two different companies.

When we talk about Porsche Holding we are talking about a car distributing company. The company operates in four business areas:

1. Porsche Holding is the general importer for VW, Seat, Skoda and Audi in Austria and most of the Central and Eastern European (CEE) countries.
2. Secondly, we do have a car retail business. So a share of the local distribution of the Volkswagen brands in Austria, CEE, Northern Italy and Southern Germany is owned by Porsche Holding.
3. The third line of business was started in 1999 by acquiring the largest automotive retail chain in France as well as a couple of other retail chains there. The business consists of what we call multi-branding, which is the retail of Citroën, Peugeot, Renault and Toyota mainly in France and in the Netherlands.
4. Finally, the fourth business area is financial services – a business run by Porsche Bank and other subsidiaries in the field of automotive captive finance. This means that in the countries where we operate as a general importer, Austria and Central Europe, we have the support of Porsche Bank.

The diversification of our business is one of the main features of the group strategy. This means that we are mainly diversified in regional markets: Western Europe, CEE and Austria. We have an outstanding brand portfolio including Audi, VW, SEAT, Skoda, Peugeot, Citroën, Renault, Porsche, BMW and Toyota. This very broad portfolio of brands gives us a diversification as well. And we have the diversification in our business units as a general importer, in retail and in the financial services businesses. So it is a very well balanced business portfolio overall.

You are also the Managing Director of Porsche Corporate Finance. How does that fit in?

Porsche Corporate Finance is nothing other than the group treasury function consolidated in one entity. We are responsible for the overall group finance, the risk management and all other treasury functions for Porsche Holding. It is one of the most centralised treasuries that I am aware of, about 95% of the group. Porsche Corporate Finance is based in two locations. The controlling is based in Salzburg and we have the front and back office in Zurich, in order to be closer to a financial market. Personally, I am both the Managing Director of Porsche Corporate Finance and the Group Treasurer reporting to the CFO of the group.

So one of the most important functions of Porsche Corporate Finance is raising funds?

It is raising funds and it is also handling the FX and interest rate risk. Due to the growth story we have experienced for the last few years, we had to set up a long-term financial strategy. When I started with the company here in 1999, Porsche Holding was just financed in bilaterals, with no capital market instruments in place. Looking at the strategic direction the company would take, we had to set up a long-term financial plan. This was based on the presumption that the company would not go public and was not going to be rated. So we needed financial instruments that did not involve a company rating and were non-IPO – or as I call it, the capital market via the back door.

We determined that the best thing to do would be to securitise the Porsche Bank portfolios, because these were purely leasing and loan portfolios. We set up the first ABS transaction of its kind in Austria in 2001 and followed it up with a couple of other transactions since then.

Securitisation is one of the most important models we have, together with a €800m syndicated loan we arranged with our core banks in 2003. In February 2006, this syndicated loan facility was increased to €1.4 billion.

In addition to that, we also succeeded in internationalising our core banks. At the same time, we reduced the number of our core banks. Our main strategy is to reflect our regional coverage in our banking relationships. So we added strong international banks to the strong Austrian banks in our core group of relationship banks.

What has your experience with securitisation been like? Is there anything you have learned or anything that you would recommend to other treasurers looking into securitisation?

First, the beauty contest is important because there are differences in structuring banks. You also need to have two people in place who are just concentrating on securitisation because it is a very complicated affair.

You also need to make sure that you have a good consistent data situation. The longer the history of the data that you have, the better it is. What we found out later, having done a couple of additional transactions, is that we decreased our margins considerably when we had better data. So there is what I would call a ‘trust spread decrease’.

We are going forward with securitisation in other countries where we are based with Porsche Bank, which is quite difficult, because of the local legislation. We are looking right now at Slovenia and Hungary, which have not seen these kinds of transaction really working yet, and we would very much like to have Romania in place, but that’s further down the road.

What about accounting or legal problems in other countries?

Legal problems, definitely. A problem in Austria, for example, is that you have a couple of restrictions in the capital market legislation. There is a so called “Vertragsgebuehr”. This is something like a stamp duty, which means that you cannot issue such papers in Austria in an ABS transaction, which is why we chose the Frankfurt stock exchange.

From an accounting perspective, we are very much in favour of having our accounts in Austrian GAAP – and not IFRS – because our major target is to achieve two things: first, the relief of equity capital at Porsche Bank; second, the relief on group consolidated balances, which is only possible under local Austrian GAAP, not under IFRS.

What was your experience with rating agencies? It must have been the first time that you had to deal with them?

Yes that’s right. This was also one reason why we chose securitisation; to enter the capital market via the back door and gain a first experience with ratings, without being rated on Porsche Group level.

Having made also some uncomfortable experiences during the securitisation it was underpinned that this is something I definitely prefer to have on that level of the transaction and not on the Porsche Holding corporate level. We were confronted by one agency three weeks before the launch of the transaction with a change in the existing cash flow models and tranches, which put into question the economic advantages of this transaction as a whole. We would rather like the rating agencies to observe the IOSCO recommendations in place, which postulate not to modify cash flow models in a running transaction.

What other financial instruments do you use?

We have three major instruments in place. One is ABS. The second is to have a liquidity insurance in the form of a syndicated loan, which was adapted to the growth of the company in February 2006. And we launched a US Private Placement in September last year. What we are looking for is the diversification of our investor base, through the ABS and the US Private Placement, and to secure the overall liquidity needs through banks. These are the three main pillars.

We very much like the long-term approach of US Private Placement investors. This was quite new for us because this company has never done a road show. There was no need to expose ourselves to a certain kind of public. We got that experience from the US Private Placement investors, in that they look differently at a company than banks do. They are not picking for ancillary business.

They either understand the business model or they don’t. As long as they have understood the business model and it is convincing to them, they have a long-term approach. They receive a continuous flow of information on what is happening in the company and they have an understanding of the company and a long-term approach which is closer to the long-term approach of our shareholders. We liked the fact that you don’t need a rating and it is a closed circle of people.

What we would not like to do is expose ourselves to a broad public. We don’t think it is value adding to share all the views of our business concept with everybody in the world. Our history since 1947 is quite successful. We have a strong equity base and strong family owners which stay with the company and as long as those circles of investors – the shareholders and the Private Placement investors – understand our view on the company, we are fine.

Are you also using warehousing transactions?

We started out with a term transaction, which is unusual, but I wanted to bring out the quality of the portfolio. You know it is a signal of quality to the outside world to release a triple A tranche for 80% of the Porsche Bank Austria business. This is a qualification by a rating agency on the quality of the portfolio and on the job that Porsche Bank AG is doing in Austria. To start with a term transaction made it more difficult than going from a warehousing to a term transaction, but I definitely recommend that if you have a certain conviction, you should show it to the market and go for a term transaction.

It takes us about two to two and a half years to build up a good volume of new business for a term transaction. So after the first term transaction, we went into warehousing. This means continuously selling into a bank’s conduit. Then, after two and a half years, we go for a term transaction, and then continue with a new warehousing. So there is a continuous stream of securitisation in place and we will go out in autumn with the next term transaction.

You have worked for both public and privately owned companies. How do the two compare?

I used to work for a public company in Germany and in 1999 I actively looked for a family-owned business. After seven years here at Porsche Holding, I can say it was definitely the right decision. Having the experience of working for family-owned and publicly quoted companies, I prefer to work in a family-owned business. Looking at my colleagues who have to deal with rating agencies and the capital markets, I think we have a big advantage. We are not doing our business on a quarterly basis, but on a long-term strategic basis.

US Private Placement is as challenging as doing a public bond. It is very interesting and challenging to have the ongoing discussions with these investors, who are well informed. You are not exposed to newspapers, which cannot reflect that much of what is going on in a company, so there is more trust and more than a superficial understanding of the business itself. It is easier to sell a business idea to a limited circle of people. And you don’t need to tell everybody in the world how you do your business. There are some secrets about why we are successful and we would like to keep them.