German lenders are under siege. Despite rapid growth in syndicated loans as borrowers move away from bilaterals, banks are facing highly aggressive competition and the problems linked to the lack of consolidation in their home market. Add the rapidly approaching Basle II deadline and the loss of the State guarantee mechanism, and the pressure for change in German loans cannot be ignored. Adrian Simpson reports.
Excluding deals with undisclosed pricing, the year 2000 yielded 50 internationally syndicated loan issues totalling US$42.5bn. By 2004, that figure had jumped to 84 deals and just over US$95bn, according to data from Thomson Financial. That growth has seen Germany metamorphose from a syndications backwater to one of Europe’s most hotly contested markets, and the trend shows no sign of stopping.
“Germany is a growth market for the syndicated loans product,” said Dietmar Stuhrmann, head of loan syndicate at Dresdner KW. “There is a high number of hidden champions at both Mittelstand and large-cap levels with lots of value to unlock.”
Small wonder then that numerous banks have placed Germany at the top of their target list, which is bad news for German lenders who have a more tenuous hold over their leading corporates than their peers in the UK or France.
Siemens’ recent €5bn refinancing provides a perfect illustration of the challenge facing German banks in their home market. Deutsche Bank was sole bookrunner in an eight-strong MLA group dominated by international lenders, with Dresdner KW the only other domestic bank in the group. The loan, which features seven-year money at a flat 15bp margin throughout and a commitment fee of 4.5bp, is indicative of aggressive bidding by international banks keen to increase market share and secure relationships.
Bayer’s €3.5bn extendable five-year facility – effectively seven-year money at a tight 20bp margin – provides further evidence of the trend. Deutsche Bank is the only German bank to feature in the loan’s six-strong MLA group. Domestic banks fare slightly better on Henkel’s €2.1bn refinancing, which pays sub-20bp, but still account for only half of the six-strong MLA group.
Superficially at least, German bankers appear unperturbed by these developments. Although a few DAX-listed stragglers are yet to tap the syndicated market, Adidas-Salomon being the most recent debut, it is generally accepted that this is a mature market segment. The consensus is that international lending groups are a consequence of Germany’s position at the heart of a modern, single-currency market. Domestic players also accept that the combined impact of Basle II and the loss of the Gewaehrtraegerhaftung (State guarantee mechanism) later this year is reducing appetite for large exposures among German lenders.
Dig a little deeper, however, and an element of frustration becomes apparent. As many non-German banks have already seen large-scale mergers and acquisitions in their own countries, they have a stable profit base from which to launch their assault on Germany. In France and the UK, most of the consolidation has already happened, allowing banks from those countries to expand into other markets on aggressive terms.
For now, German banks appear comfortable to share the spoils of growth in their domestic loan market, maintaining there is sufficient opportunity for all. They also recognise that Germany’s largest corporates are attracted by the combination of large pools of committed liquidity and ancillary services offered by the new market entrants, services that mid-range domestic lenders are poorly equipped to provide.
Kevin Murray, responsible for German loan syndications and trading at BNP Paribas, explains: ”We regularly win MLA and bookrunner roles, generally with a combination of top German banks and usually a US bank. This mix in the MLA group for top-tier German companies reflects the borrower’s global business base.”
In reality, this apparent sense of fair play probably has more to do with the fact that full displacement of local players lies some way off in the future – if ever. The belief that domestic banks are more likely to stick close to borrowers through hard times remains entrenched, even before national allegiances or political expediency are considered.
While relations at the top of the market may appear congenial, the real battle is being fought elsewhere. With tightening commitment fees set to erode the flow of jumbo refinancings on undrawn liquidity lines, banks’ attentions are firmly fixed on the mid-market as the new growth driver. This could lead to some interesting statistics.
As Matthias Gaab, co-head of European loan capital markets at Deutsche Bank says: “Many of the big names have already been to market, so early refinancings are skewing the overall picture. Volumes could be down by the end of 2005, but we are likely to see bigger deal numbers as new names come to market.”
The Mittelstand represents home territory for Germany’s overbanked financial sector. In recent months, hospital operator Helios Kliniken, rooted in the upper mid-market with a turnover of €1.1bn, caused a stir by turning to BNP Paribas and WestLB to joint bookrun its €100m revolver, a move which proved non-German banks were actively targeting and winning lead roles at this level.
The news that mid-range companies are following their larger cousins by borrowing internationally carries mixed blessings for traditional relationship banks. While happy to reduce their overall exposure, aiming instead for central roles in comfortable club-style syndications, German banks can ill-afford to lose influence in their core market.
Ulrich Mattonet, head of loan syndication at Bayern LB, is in no doubt about the implications for traditional lending banks. “We used to be a major lender without going after MLA titles. As a consequence of low pricing, we want the additional fees, so we are going after the arranger role,” he said. Ironically, foreign banks’ attempts to increase market share with super-tight pricing is actually increasing competition.
Despite the initial scalps won, building lending relationships with mid-market companies may prove hard to achieve. The engine room of the German economy is full of smaller companies with quite different needs to the multinationals, a fact that partially explains the unruffled response of Michael Legeland, head of loan distribution at Commerzbank corporates and markets.
“Customers have a broad range of requirements that can’t easily be provided out of a single central office, for example cash management, payment services, trade finance and letters of credit. This adds to the depth of relationship,” he said.
As these services require a regularity of contact that would be difficult to achieve without a significant local presence, it follows that banks wishing to break in to this segment of the German market would have to make significant investments. But as these companies have little in the way of lucrative capital markets business to offer, and no-one is lining up to acquire German banks, it seems more likely that the hot competition will remain focused on a narrow range of companies in the upper mid market.
Private equity boom
But if German banks succeed in defending their Mittelstand business, it does not follow that they will escape change. The old model of the family-run business with its enduring banking relationships and patriarchal culture, is rapidly losing its validity. Following years of suspicion, third-party financial sponsors are firmly in favour, largely as a result of the track record they have built for themselves, although the tepid IPO environment has helped.
The result is a private equity boom in Germany, with Thomson Financial data showing that the number of deals leaped from 24 deals totalling US$18.5bn in 2000 to 41 deals worth US$23.9bn in 2004. That made Germany the second largest LBO market in Europe, behind the UK.
Just how established this form of financing has become is evident from the number of recapitalisations, with names like Tetra, Demag Investments and FTE Automotive lining up in the past few months with the aim of repaying equity to sponsors.
In common with the rest of the European market, the private equity bonanza is not restricted to smaller companies. Cognis, Tank & Rast, ATU and Sola have all tipped the €1bn mark in the last six months, generating a feast of leveraged paper banks and funds alike. And if the talk surrounding aircraft leasing firm Boullioun proves correct, the best is yet to come, with the circa US$3bn price tag already whetting lenders’ appetites. Structures have also grown in sophistication, with specialist providers popping up in response to increased demand for products like mezzanine.
All this activity in the leveraged sector poses an interesting question. With the first signs of a possible resurgence in M&A stirring across the Continent, will larger German corporates continue to stand by and let the private equity firms grab all the action?
Christof Muerb, managing director in loan capital markets at Deutsche Bank, thinks that a large number of corporates are certainly in shape to consider acquisitions.
“We’re seeing more requests and are discussing more ideas than in the last few years. The number of debt-financed acquisitions has not substantially increased, but balance sheets are now cleaner, leaving room to re-leverage,” he said.
Then again, as most interest in the German market has come from large commercial banks in search of relationships, the influx of investment banks seeking advisory mandates would add to the competitive pressure. If Germany gets any hotter, the first mergers may be the often rumoured ones between the German banks themselves.