German Corporate Funding Roundtable 2010: Part two
IFR: Thomas, isn’t the answer rather than being competitive funding tools, bonds and loans are complimentary. I’m curious to know also how the relationship banking model has evolved out of the crisis.
Thomas Kull: I’m strongly convinced that the relationship model remains at the core of the relationships between banks and issuers. We saw that during the crisis. I don’t fully agree with Matthias’ view that the bank market is always reliable because we did have some fallout at the end of 2008 into the beginning of 2009. The syndicated loan market was very difficult at times, but bank financing didn’t go away; there were adjustments being made, such as club deals with even stronger relationship ties. This has proved to be very sustainable. The backbone of financing for German corporates will continue to be the relationship-driven lending market in the form of bilaterals, club deals and syndicated facilities. But we have structural changes so loans will constitute a smaller portion of overall funding needs, and a bigger portion will be funded in alternative markets like the bond market, the Schuldscheine market or using other more capital market-related instruments.
But the syndicated loan market is a little bit divided at the moment. We talked earlier about Telefonica. I think well-known brands, good credits are able to raise money with attractive margins at longer tenors. However, for sub investment-grade companies or companies in difficult situations, credit is still a scarce resource and it’s difficult to get it even from relationship banks.
Mathias Noack: I don’t fully agree. It’s not scarcity value, it’s that both sides have to find a middle ground on where to price and how to structure deals. I don’t believe there has been a credit shortage; there have been more arguments along the lines of: “Why should I suddenly pay you a 2% margin if I have paid only 25bp in the past?” But in principle, banks were there for their relationships. Yes we have seen the investment banks falling away, and shutting down bilateral facilities but in principle there were other banks prepared to step in for the right price. So the market was there, the liquidity was there. It was more a question of finding a middle ground between the client and the bank in order to provide funds.
IFR: From a structural perspective, the loan market did morph from a fully underwritten market to more of a club market, which lenders were quite happy with because the fees were pretty good. Have we seen the return of retail lenders? Or are there signs emerging, that we will get back to perhaps the big syndicated financings?
Matthias Gaab: For the time being, our problem is that there are no comps around with large transactions where you can give it a go. There’s a question mark over testing the market where you’re none the wiser, There is appetite there to do an underwrite, but there is certainly a very important focus on ways out of that commitment. The most important way for the time being, I guess, continues to be the bond market rather than the loan market. If there remain residual amounts then some guys might want to test the retail loan market. The Telefonica deal is unlikely to provide a test of retail loan investor interest because of the aggressive margin.
Mathias Noack: But not only the pricing, large corporates in particular tend to reshuffle their banking consortia. They also have a new approach towards their lending relationships, probably given the experience over the past 18 months. Most big corporations want to reduce the number of lenders because of reciprocity. They know what kind of cross-selling ancillary business they can offer their banks, so the big names are coming to market with self-arranged deals, and are basically determining which banks they want in their next facility. There’s hardly any need for the retail syndication market because we’re not being asked. We can structure and co-ordinate a deal but it’s not the kind of syndication we used to see three years ago.
To really see the resurgence of the retail market we need to see more event-driven business, more deals and more volume. Then, of course, we have to go broader; we have to find new sources of liquidity. For the time being, there’s very little volume and corporations know exactly what they want, who to speak to and who to approach.
Johannes Heinloth: I fully agree with Mathias. The Inbev transaction is a very interesting example because the company significantly reduced the amount of banks it is working with now. It obviously had to increase its bank group to finance its takeover [of Anheuser-Busch] but now the company is very demanding in terms of minimum exposure per bank and they can make that demand simply because the competition is there. With self-arranged transactions, borrowers have quite an interesting lever on the banks. Lenders need to be prepared to put the size of the ticket on the table so that with a limited number of banks, you can get the deal done.
The Schuldscheine market is also an interesting market for retail banks. If you look at these banks, you probably have some sort of demand for interestingly priced assets. We are not talking the big names with tightly-priced assets, of course, but weaker credits. I would think that there is some liquidity out there that you could tap if you had problems tapping the capital markets.
Thomas Kull: I can confirm that there is substantial demand from typical Schuldscheine investors - retail banks. They’re not getting the assets they’re looking for. They have liquidity and want to put it to work in a loan-like product but they can’t find the investment opportunities. We were talking earlier about the favourable funding conditions, at the moment. I think everyone around the table would like to see more bonds being issued and more syndicated loans being done because the liquidity is definitely there. And we all agree that the margins and conditions in general are very favourable. But due to pre-funding, due to working capital management and to the lack of big-time M&A activity, the need is just not there.
Mathias Noack: The question is whether the Schuldscheine is the most suitable product for everybody.
Thomas Kull: This is a niche market.
Mathias Noack: It’s a niche market but I think we have seen that Schuldscheine have been offered to a lot of different corporations and some of them have gone through difficult times. From a restructuring perspective, Schuldscheine investments have been extremely difficult.
Olaf Sarges: We shouldn’t forget in our discussion that we are still in a very artificial situation and it’s still the impact of 2008 and 2009 that is determining the situation we are in today. If you go back to 2008, 2009, frequent issuers were paying high coupons: automotives 8%, 9%, utilities 7% because liquidity was the name of the game. If you look at the second half of 2009, frequent issuers are out of the market and unrated issuers are in. The Schuldscheine market saw similar developments: at the end of 2008 and the beginning of 2009, there was a stream of mega transactions especially from German issuers, but also with some international players because the volume was there and the spread advantage to bonds was immense in most cases.
Bettina Streiter: And for a lot of people, the bond market was still shut.
Olaf Sarges: In our experience, while we still see private placement Schuldscheine for big issuers, in general we are back to the kinds of corporates that have been the original issuers of Schuldscheine i.e. Mittelstand companies that, let’s say, are looking for an issue volume of €50-100m with a turnover of €250m to €2bn.
On the combination of the bond and loan markets, I think we are in a very artificial situation there, too. In the first half of 2009, many of the frequent issuers reduced their CP issuance and didn’t do much of anything on the loan side. They issued more bonds than looking back from today might have been needed, but I think at the time it was the right thing to do.
That’s the reason we see so few bonds now. The best example is the utility sector. On the Euro side in Germany, we haven’t seen a single issue out of the utility sector, whereas in 2009 there was some issuance and in 2008 there was huge issuance.
The combination of activity picking up in the loan market, maybe an increase in CP volumes (for frequent issuers) and the low interest-rate environment is enabling unrated companies and high-yield issuers, to come to the market. The demand on the investor side is definitely there, and since the supply from many [rated] issuers that have been active in 2009 and early 2010 is drying up, the market needs to go in this direction.
Click here for Part three.