Germany 2006 A German renaissance
The German loan market is hot. Having fallen to a distant third position to the dynamic French and mature UK markets, Germany is now at the centre of Europe’s spectacular M&A-led revival. Nachum Kaplan reports.
After years of getting their balance sheets in order, German companies are now sufficiently emboldened to pursue acquisitions and they have foreign companies in their sights. And with the European loan market so liquid – not to mention cheap – it is little wonder that this acquisition frenzy is bringing billions of euros of loan paper to market.
"Companies in various industry sectors are in good shape and have trimmed down their balance sheets," said Dietmar Stuhrmann, head of loan syndicate EMEA at Dresdner Kleinwort Wasserstein.
"Once one company moves to make an acquisition, all of them are likely to move. This is just the beginning of a major M&A wave."
Most stunning has been German multi-utility E.ON, which has just smashed the record for the largest European loan in history with its €32bn loan backing its bid for Spain’s Endesa. But E.ON is far from the only German company turning to the loan market to fund its acquisition.
Industrial gases group Linde is planning an £8bn tap to support its purchase of UK rival BOC, coal-to-chemical conglomerate RAG has secured a €5bn loan to back its acquisition of the 49.9% stake in Degussa that it did not already own, while Pfleiderer has secured a €775m loan to fund its acquisition of Kunz Group. And the acquisitions just keep on coming with pharmaceutical group Merck tipped to support its hostile €14.6bn bid for rival Schering with a loan.
Loan bankers like three things about acquisition loans. First, they provide new lending opportunities. These are vital to Europe’s loan banks, which are over-capitalised and must either find someone to lend their money to or face the dreaded prospect of having to hand funds back to shareholders.
Second, acquisition loans pay a premium to the general corporate revolvers that have dominated the European loan market over the past two years. While acquisition premiums have eroded and are not that high in absolute terms – E.ON is paying headline margins of just 22.5bp and 27.5bp over Euribor on the one and three-year tranches of its €32bn loan – yields on M&A loans are still higher than on corporate revolvers. Bankers, however, expect such premiums to return to more economic levels.
Finally, acquisition loans are drawn. This means that not only do bankers get to put their money to work – unlike on most drawn revolvers – it also means they pay their headline margins and not just paltry commitment fees.
"It's too early for the return of acquisition premiums as banks have relatively little choice. It may be the middle of the year before flows are better and we see pricing tick up," said Dresdner's Stuhrmann, adding that credit-transforming acquisitions often provide other opportunities for banks to pick up fees. "In investment-grade deals, bidders expect a total package. If they are successful, they may expect a deal on the fees. While there may be decent levels of fees, they may be paid in instalments as the deal progresses."
While the M&A renaissance is a global phenomenon, the fact that Germany is leading the way is significant for the development of the European loan market. The UK has traditionally been Europe’s biggest loan market and France and Germany battle it out for the number two spot. However, as the UK market has matured into a large club market and the French market has morphed into Europe’s largest and most dynamic market, Germany has ended up a distant third – an odd position for Europe’s largest economy.
Data from Thomson Financial demonstrates just how big the surge in German loans has been this year. Year-to-date there has been €42.7bn worth of loans done in Germany, slightly below the €47.4bn done in France and significantly more than the €35.9bn done in the UK. This is remarkable given that the German market is usually substantially smaller than its French and UK counterparts.
TF data shows that German volumes at just €148.7bn last year were well behind France with €213.2bn and the UK with €220.9bn worth of loans. And the story was the same in 2004 when Germany's €105.6bn worth of loans was well below France's €130.8bn and the UK's €195.2bn.
The M&A resurgence means there is a real chance for the German loan market to narrow the gap to the top two markets. And it is not just M&A. There are signs that the German market might finally be developing some real depth. The slow trend of corporates rolling over their bilateral facilities into syndicated ones is continuing but looks set to accelerate now that the corporate debt overhang has eased.
French and UK banks have big ambitions to break into the German market. Their aggressive push began in 2001 and 2002 when they established relationships with key German corporates. The fact there were so few acquisition deals over the ensuing years meant there was little chance for them to develop these relationships into meaningful ancillary business. Now that event activity is back, French and UK banks are all over Germany again.
"Germany is definitely this year's key battleground for European banks," said one European syndicate head. "Germany is where the most lucrative mandates are and it's also the market with the greatest growth prospects, which is why everyone wants a piece of the action. German banks are well placed to win a good share of the business but they're going to face stiff competition from foreign banks."
The stakes in Germany are different for French and UK banks. French banks have spent the past few years transforming themselves into pan-European institutions and many are still in the middle of this process. Given than France has the most open loan market in Europe and that the UK market is all but impenetrable to foreigners, Germany is an obvious place for French banks seeking to cement their European ambitions.
UK banks' aims in the German market are twofold: to build their European franchises and to export specific skill-sets to Europe. Of more interest to them, though, is the potential for growth among middle-market names. Most of Germany’s big borrowers have already gone down the syndicated loan route but there is huge potential for the company’s mid-cap names to follow suit.
Middle market borrowers are a crucial part of the UK loan market and the differential between Germany and the UK in this part of the market is so stark that it really highlights why the market looks so attractive to UK lenders, which have strong expertise in this sector of the market.
TF data shows just how international the German market has become: five of the top 10 bookrunning banks – RBS, Goldman Sachs, Barclays, Mizuho and JP Morgan – are non-German. This is not to say that German banks will not cash in on the Germany boom. Deutsche Bank, Dresdner Kleinwort Wasserstein, Commerzbank and HVB always feature strongly in German loans and the market seems big enough reward more than just four banks.
The challenge for international banks is to ensure they do well against other foreign banks in Germany, rather than replacing incumbent German banks, which is a much tougher game altogether.