Thursday, 18 October 2018

Germany restored

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Long and cheap bilateral loans once dominated the German loan market but it has morphed into Europe's largest syndicated loan market. And German companies, despite being relative newcomers, are already among the most adept borrowers in Europe, raising large loans at competitive rates and the taking these loans out through the capital markets. And the openness of the German market means even smaller companies are enjoying unprecedented levels of liquidity. David Cox reports.

Data from Thomson Financial shows that German companies have signed 107 loans worth almost US$189bn so far this year, which although smaller in terms of number of deals, has already overtaken last year's US$184bn volume total. At this level, Germany is now the largest loan market in Europe in volume terms, overtaking the UK, which has traditionally held this title, and France, which has occasionally challenged for it.

The new situation corrects something of an unusual situation. Despite its status as Europe's largest economy with a capital intensive manufacturing base, Germany has long been a minnow in loan terms. For example, even at the height of the technology boom in 2000, German companies borrowed just US$50bn, making it the fifth largest market in Europe. British companies borrowed US$312bn that same year.

After long relying on bilateral lines, most decent-sized German companies now have a large syndicated five-year or seven-year back-up facility. And this year German companies returned aggressively to the acquisition trail and showed themselves to be highly effective users of the loan market.

"The year may end up with fewer deals in number of transactions than last year, but in terms of volume, profitability and required expertise the quality has been higher," said Dietmar Stuhrmann, managing director at Dresdner Kleinwort. "Last year the market was dominated by cheaply priced refinancings, while this year has seen more deals that are funded merger deals and debuts, both closer to the CDS and bond price."

E.ON exemplifies this expansionary phase. To fund its audacious takeover attempt of Endessa, which, if successful, will create the world's largest utility, E.ON put in place a €32bn loan. To ensure the success of what is the largest loan from a European company to date, the group paid a clear merger premium and offered a clear refinancing route for the bulk of the facility.

Other German companies - like Linde and more recently Merck - have since followed this strategy when looking to fund transformational mergers. This means that 2006 will be a profitable year for many banks.

Open market

Despite the German loan market's late blooming, it is a very open market. International banks are highly active and their presence, along with borrowers' openness, means that German companies enjoy some of the continent's cheapest loan pricing, along with French borrowers.

German borrowers generally enjoy a 5bp-10bp pricing discount to similar rated British corporates, which have to borrow in a less open market that the large UK clearing banks dominate.

"Germany is very integrated in the wider European loan market, meaning the international factor in terms of banks is very important," said Dresdner's Stuhrmann. "German companies seek advice from their house banks but they are most certainly not willing to overpay and pricing is very competitive. However, as loan markets mature it is natural that you have a concentration of business with the majority of syndicated loan business carried out by a few leading banks."

This liquidity is not limited to the top tier with international banks increasingly attracted to the Germany's vast Mittelstand, which has been busy this year. A few years ago much the middle market was suffering as German banks faced credit issues and pulled back from their traditional lending activities. But the sector is now seen as highly profitable and increasingly a focus for international and European lenders.

"From focusing on Dax 30 companies a few years ago there is now huge interest from international banks even in the smaller Mittelstand market," said Peter Rochus at WestLB. "The Mittelstand was previously covered entirely by German banks but with mergers turning previously German-focused companies into larger European ones, there is a lot of interest and this is having a positive impact in terms of pricing and liquidity."

And with German companies showing no signs of slowing their acquisition spree, German bankers are confident that the market will consolidate its position and stay as Europe's largest market. "Given the size of the German economy and market, it should be the largest loan market in Europe," said one banker.

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