Friday, 21 September 2018

Grinding to a halt

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After a period of relative resilience throughout 2008, activity in Germany's equity capital markets has virtually ground to a halt in 2009, with the high expectations of the start of the year proving to be seriously overblown. Nevertheless, there is some optimism for the second half, as Chris Vellacott reports.

This year promised to be a landmark for German ECM. If all went to plan, it was to start with a high profile privatisation and would be sustained with a steady flow of acquisition-related capital increases.

The reality, however, has proved far less impressive. Activity has virtually ground to a halt and some of the regionally-focused German banks are rumoured to be on the point of closing their ECM businesses.

In Europe, Germany ranked 10th in terms of issuance volumes during the first quarter of 2009, accounting for US$121.7m from a total of nine deals.

This looks pallid compared with the UK, which saw the highest issuance in Europe during the quarter, at US$7.3bn from 93 transactions. Among other leading economies in the region, France came fourth with US$2.6bn from 11 deals, while Swedish companies issued US$2.4bn in four deals.

Nevertheless, a handful of transactions and the promise of more activity to come mean that Germany-focused ECM bankers still retain a degree of optimism for the second half of the year.

At the end of 2008, hopes were high that the previously cancelled part-privatisation of DB Mobility Logistics, the logistical arm of the German state railways company, could be resuscitated. The planned IPO, tipped for a deal size of up to €8bn, was called off by the German government in autumn 2008 because of ongoing market volatility.

Bankers mandated on the transaction were optimistic that continued interest from a number of strategic investors could give enough lift for a relaunch this year. Those hopes came to nothing, however, and the transaction tipped by many as the catalyst for a revival of Germany’s IPO market, faded from the pipeline.

Undeterred, German bankers then started to pin their hopes on a trickle of acquisition finance-based deals as healthy companies absorbed their distressed peers. This was regarded as especially likely in sectors where Germany enjoys a competitive advantage as one of the world's greatest exporters, such as capital goods and machinery manufacturers.

The trend has yet to materialise in earnest, however, with unrelenting market stress and uncertainty about macroeconomic prospects keeping a lid on issuers' capital raising attempts. German companies have concentrated this year on reducing capacity and cutting costs and are consequently unlikely to turn their attention to acquisitions until this process has run its course.

"An increase in M&A looked more likely a few months ago but a lack of visibility on economic prospects and outlook is subduing this type of activity," said Klaus Schinkel, head of German ECM at RBS.

Indeed, the collapse in global trade volumes has hit German corporates, largely dependent on exports, especially hard. This might be regarded as an opportunity for German companies to boost their balance sheets with capital raisings in readiness for tough times. Companies in troubled sectors such as construction elsewhere in Europe have followed this strategy, with firms such as Lafarge and Saint Gobain in France and British Land in the UK carrying out rights issues.

But Germany has not seen a wave of rights issues, neither for strategic reasons nor for the rescue of stretched balance sheets such as that seen in the UK so far this year. And while the tide of recapitalisations is expected to shift away from the UK and towards continental Europe throughout the remainder of this year, few bankers expect Germany to form a significant part of this trend.

There are three reasons for this, bankers say. First, German corporates are considerably better financed than their counterparts in the UK. Second, the apparent eagerness of the German government to come to the aid of stricken banks also rules out a source of dealflow that sustained UK ECM volumes late last year and in early 2009.

While the UK state took stakes in financial institutions such as Lloyds and RBS, it did so only after ham-fisted attempts to raise equity through rights issues that saw low take-up.

The third hindrance to German rights issues is the prevalence of family shareholdings in some of the largest industrial firms. "In Germany, family shareholders are an important feature of many large companies, so dilution can be a major concern as they may not have the wish or the means to participate in a rights issue," said RBS's Schinkel.

Bankers speculate, however, that family investors or part-owners of companies may decide to pursue the ECM route to recapitalisation if convinced of the benefits of being an early mover. The progress of German ECM during 2008 certainly illustrates the perils of leaving a launch too late and missing a window of opportunity in a fickle market, with the renewable energy sector being a case in point.

For much of 2008, renewable energy companies defied shaky markets with a series of successful deals. Transactions last year included a multiple times-covered €315m IPO from SMA Solar Technology and a €112m rights issue from Manz Automation, both in June, and a €54.3m rights issue by Solar Millennium in March.

The deals were by no means easy and lead managers had to play the market by ear, waiting well into the subscription period before fixing a price towards the lower end of initial expectations. Nevertheless, they demonstrated that in an area where German companies are firmly established as world leaders, deals were possible in spite of a declining market.

But the cancellation of a €500m IPO from Schott Solar, pulled after the book closed in October, demonstrated that the window had been open only for a limited time.

Second half pick-up

But aside from ECM volumes falling some way short of the more optimistic assessments of late last year, bankers still expect to see a pick-up in activity as early as the second half. Rights issues may start to gather momentum as the global slowdown continues, while the handful of transactions so far this year should lend some traction to the market.

One of these is a €412m capital increase from pay-TV group Premiere which follows a smaller deal carried out in January. Subscription opened on April 8 and a result is due on April 21. The deal is helped by a backstop from core shareholder News Corp, but a broader success could help lift wider sentiment.

Fund manager MPC raised €48.5m in a rights issue which completed in February, also supported by core shareholders.

Deals in the pipeline include a planned €1bn capital increase from tyre and auto parts company Continental, although the company has not yet appointed a banking syndicate.

And although Germany's export-dependent economy is suffering in the global downturn, its companies remain highly regarded among investors and the prevalence of family-owned companies means plenty of potential dealflow.

In the recent global equities crash, German shares posted losses in line with or slighter than their counterparts in other western European markets. Over the last 12 months, the DAX index lost around 35%, compared with a loss of 33% on the FTSE 100 and 40.5% on France's CAC. Sentiment among equity investors should therefore be no worse than it is elsewhere – at least in theory.

But despite acceptance that German companies are well capitalised and the potential influence of widespread family ownership, the prospect of an imminent reopening of the IPO market remains distant.

"I would not bet on too many IPOs this year but with a certain amount of recovery I wouldn't exclude the possibility that some stronger companies should be in a position to come to market in the first half of 2010," said Josef Ritter, head of German ECM at Deutsche Bank.

Another setback for German ECM related to inauspicious timing is the apparent stagnation of attempts by Deutsche Boerse to attract emerging market company issuance to Frankfurt. The exchange has attempted to challenge London's supremacy in listings of global depository receipts, targeting issuers from Russia and the CIS, as well as China and India.

Frankfurt can compete with London, Deutsche Boerse officials argue, on price and efficiency and by exploiting German leadership in areas such as renewable energy and technology.

The plan of action to attract GDR listings was drawn up in consultation with the main ECM banks active in the target markets, according to a spokesman for the exchange. There was a formal launch for the initiative late last year and the project is now being actively promoted to prospective issuers.

However, the plan launched in the midst of the financial crisis, falling stock markets and a collapse in investor demand for new issues, greatly diminishing its progress.

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