German Corporate Funding Roundtable 2012
IFR’s German Corporate Funding Roundtable, held in Frankfurt in mid-October, convened an expert panel of four DCM and four syndicated loan professionals. The conversation was a fascinating and insightful exchange of views and it took place at an equally enthralling point in time.
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From a financing perspective, circumstances have clearly benefited the bond market. Technical bond market factors plus the safe-haven status of Germany have rendered DCM an almost irresistible source of financing for German corporates. If benchmark government bond yields have been squeezed to all-time lows, credit spreads have also ratcheted in, making all-in financing costs an almost once-in-a lifetime opportunity for borrowers. That sentiment is reflected in chunky underwriting volumes year-to-date and a very positive prognosis for deal flow in 2013.
All of that said, to write off the loan market in Germany would be missing the point of what’s happening and how the two markets interact. Loans continue to be a baseline corporate funding tool, not just in the Miittelstand, but at the top of the corporate spectrum too. Clearly, the range of options at the disposal of large well-regarded companies is and has always been much greater, but syndicated loans are not out of the picture.
There has been some clear leakage of activity from loans to bonds and this shows no signs of slowing down in 2013. But the two markets are not always inter-changeable. Event-driven transactions that need to be funds-certain will by definition gravitate to the loan market, and as an unfunded instrument, loans, will always have a role to play. There are maturity differences, too. From this perspective, the two markets are clearly differentiated; even more so under current technical conditions that have pushed borrowers to the long end to lock in those yields. The loan market, by contrast, continues to play in the shorter maturity bucket. Roundtable participants spoke a lot about the complementary nature of the various capital market segments.
Of course, the conditions at play in the bond market are impermanent and are likely to change quickly, if and when, for example, the ECB and US Fed modify their stimulus-driven monetary policy stances. So rather than abandoning the loan market, borrowers are tending more towards a shift in their funding profiles.
A pick-up in event-driven activity will certainly boost loan market opportunities, and loan professionals will continue to focus on refinancing, even of 2015 and 2016 lines. There’s also an expectation that debut borrowers will emerge in the loan market as banks work to increase what some see generally as low penetration rates of German corporates into the capital markets.
In the bond market, corporates will continue to be a focus of increased activity. Debuts are also expected here, particularly from MDAX and SDAX companies that may have used Schuldscheine or syndicated loans but which are actively now looking at DCM. And if event-driven activity picks up, the bridge to bond model that works so well will also boost volumes.