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Thursday, 23 November 2017

IFR German Corporate Funding Roundtable 2014: Part 3

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IFR: Matthias, how does the relationship card play out in acquisition financing in this environment and in general? Put a different way, do clients respect the relationship in the same way as they did before? Or are they being impelled to adopt a more mercenary approach to financing, given the alternatives?

Matthias Gaab, Deutsche Bank: Relationship is always important. That lies at the core if you believe that as a service organisation like a bank you need to provide solutions to clients. The market is pretty diverse in terms of clients. Of course we have large-cap clients who on large issues, especially in the bond market but also occasionally in the loan market, are interested on the basis of their name recognition in the best price and that’s about it.

They also have their own resources to determine what the right solution is for them. That might from an outside-in perspective, look like a pure product-driven exercise. But I think generally, for the overall strategy of a financing institution like a bank, without a relationship is probably difficult to offer the right mix of business.

In the crisis we were telling clients: “Well, lending is difficult given our funding costs etc”. Now that disintermediation has taken another step: number one, we shouldn’t complain. Number two: we should be mindful of what we told clients. As long as the same people are still in their jobs, you can’t expect people to forget about this.

Given that all of the banks are faced with more intensive regulation than any of us probably imagined at the time, we need to live with disintermediation and the fact that the client is not only looking at lending, there’s a larger story out there. From that perspective I believe the solutions-driven approach is much better than the pure product-driven approach, where in the end you tell the client: “I’m just offering you a loan and if you don’t want it you’re making a mistake”, which is certainly not the right approach.

Roland Boehm, Commerzbank: This is a point that I see fed back to me constantly by clients. Borrowers are actually extremely cognisant of who they have in their banking group. Even if they have a lot of choice, they choose carefully. They are well aware of who their partners are and they know that there are good times as well as bad times.

While banks need to be competitive to stay in the game, clients also very actively choose who they want to have in their banking group, rather than just who is available. I think that means the relationship model is absolutely alive and well.

Joachim Erdle, LBBW: I would add to that: if you reduce your core banks, you need to choose the right ones, so relationship becomes even more important. But it’s not just a question of coming up with objective advice, it’s also a question of performance. In fact, it’s a combination of competence, performance and relationship and coming up with integrated solutions. That is basically what is currently driving the corporate business.

Christian Reusch, UniCredit: The challenge for a good relationship banker is to maintain a high level of understanding and performance during periods of plain sailing, which we’re enjoying now. Because precisely when competition is high, you try to relive what you might have done with the client during the crisis. That is certainly in the memory of the client but you need to stretch further because that’s what other people are doing to take part of the cake that’s on the table.

Like at a party, you’d better be first. From this perspective it’s important to keep and maintain the quality of the relationship very high. You can’t put this in place over a very short period; it grows over time.

IFR: If I may just stay with you, Christian: I have a similar question but in a slightly different context. You made reference earlier to high levels of oversubscription in the bond market, which renders the syndication and allocation process a bit of a nightmare. How do your institutional investors play the client card with you when it comes to allocation? It must be quite hard?

Christian Reusch, UniCredit: It’s the same miracle as any other. Times probably haven’t been easier. Five or so years ago where we had transactions with 100, 200 or maximum 300 investors, today we’re seeing books with 500, 600, in some cases up to 800 investors in multi-tranche transactions. It’s quite important to try and keep people happy but that’s obviously very difficult. But there are services other than pure allocation, such as research and liquidity provision that you offer clients.

From an investor’s perspective, these things come into the equation when they judge whom to go to. Obviously in a benchmark transaction you go with the banks that are on the deal, whether you like them or not. If the asset is interesting, you’ll put in a bid. With, say, 500 orders in the book you won’t be able to discuss whether you allocate 1% more or less because the level of over-subscription on average is three to five, depending on the rating scale. So from this perspective it’s an academic discussion. In any case, you want to ensure the highest quality possible when it comes to allocation and try to limit the share of fast money to a minimum.

Ingo Nolden, HSBC: This is the service we get paid for. We’re here to advise clients; clients clearly want the best allocation possible. This is where we offer benefits. The relationship – and this is what has been mirrored from all sides around this table – is with the bank.

Clients might have specific relationships with the BlackRocks and PIMCOs of this world, but they are selective. All clients value the banks’ relationships with investors and our professional judgement around how to treat them in such a process. Not wishing to repeat what people have already said, but relationship is our key asset, our USP. It’s no longer liquidity; that’s been disintermediated by the central banks.

What it comes down to is we’re competing with each other in the market, with other sources of liquidity for corporates, with our professional judgements and our knowledge of clients. When you are in a leveraged acquisition financing process and you’ve got a 48-hour turnaround time, when you know the client and the product guys know the client, it can usually get done very quickly and the turnaround time can be smooth and very diligent.

Everybody has seen the client, has got contact with each and every layer and that makes it easy. And this is something nobody can compete with the banks on, not even the large asset management companies who just don’t have the capacity.

IFR: To Christian’s point, though, let’s say you have a €1.5bn benchmark transaction for a well-known company. You open the books and get killed in the rush. With 800 orders, there is no way you are going to allocate the majority of those, given you could probably do the billion and a half with a handful of orders these days.

Ingo Nolden, HSBC: You can argue whether that would be a good recommendation for the client, although it depends what they want. Assuming you have a book with 800 line items, it’s up to the syndicate guy to be as professional as possible, to single out the accounts we need to discuss with the client, which comes down to maybe a handful or two. Nowadays syndicates work together day-by-day so they know each other very well, which makes it easier.

It’s possible to do it diligently within a couple of hours but by the same token, you can’t just put into the Internet or have a computer do the work for you. It’s manual work

IFR: Yet big investors complain all the time that they get under-allocated relative to their assets under management while the small guys complain they always get zeroed. Is this is a sign of the times? Plus, you also have multiple underwriters on transactions. I know this is about reciprocity but in most cases you really don’t need multiple underwriters, do you?

Christian Reusch, UniCredit: I couldn’t agree more. Unfortunately in some countries you sometimes find yourselves with eight, 12 or even 15 bookrunners, active and passive. We’re very good at finding new terms to describe underwriters’ positions to make everybody happy on those trades. The more people you have actively involved in a conversation doesn’t necessarily improve the conversation. In fact on a transaction that’s multiple times oversubscribed you could ask yourself, why you need any bankers on it, because it’s clearly an asset that’s too hot to handle.

It can be difficult dealing with investors that are active in multiple jurisdictions because you end up in situations where you’ve allocated X amount to country A that 5% less to country B. They have internal discussions and figure out that one got treated better than the other, which can lead to hassle. But having said all of that, there is more than one item to discuss with an institutional investor; at the end of the day, it’s the package that makes it happen.

But you’re not going to be able to make everybody happy. There is a fine line and, as Ingo rightly pointed out, if you are in transactions day by day, you gain a pretty solid idea about what investor, A B or C is doing. Obviously you have more of a focus on people who are continuously in transactions. If there is a completely new name in the book, it’s not very likely that they’ll get the attention, put it that way.

Unfortunately, I’ve rarely seen people after an allocation happy when the trade has been multiple times oversubscribed. Even more so if the bond trades up.

Ingo Nolden, HSBC: This is what’s leading to more bespoke offerings, where investors come to us and say: “Listen, I really want this allocation. I am not doing credit work on a specific name and going home with €5m”. So we come back to the multiple options issuers have nowadays. Investors need to bring something different to the table to differentiate themselves be it in tenors, be it in currencies, in formats, whatever. This is the nature of this very competitive market on the investor side.

Christian Reusch, UniCredit: In some situations that gets to a point where some investors are inclined to bid more aggressively than they usually would to secure the amount they would like to put to work, so they are accepting levels where were it a benchmark they would complain. On the bespoke side, they are showing much more flexibility as long as they can get their money to work.

They have also learned that the due diligence process takes probably even longer than with the banks because they are not yet as flexible as we are and need to catch up. They’ve realised that it’s not just a case of using a copy and paste model and claiming a differentiation factor because they’re not asking for ancillary business, which is the main differentiation point from the banks. That certainly plays a role, but I think there is more to come to the table.

IFR: What challenges or downsides do you as a group see, if any, looking forward to 2015 relating to Germany that might be affecting your planning, your budgeting, your expectation setting?

Roland Boehm, Commerzbank: Germany-specific? None, albeit we are expecting the very heavy competition we’ve seen in 2014 to persist into 2015 as well. Two things I would like to throw out there: expect the unexpected. I think that is something banks and clients need to bear in mind. And geopolitics. I think we’ve all acted as though history is dead but it’s alive and kicking. It hasn’t had much impact on the European market and certainly not on the German market, but I think it is a healthy reminder that these issues are there.

Joachim Erdle, LBBW: I agree. It’ll be something unexpected. Despite everything we’ve been seeing in Ukraine, nothing has really happened, market-wise so basically on that basis I would say these things have already been resolved – not for Ukraine or Russia but I mean I don’t expect any market impact from geopolitical issues. If I think about what will seriously affect general business, it’ll have to be more serious than that.

We’re clearly thinking about where the next crisis might come from, but with regard to the budgeting process you mentioned, we’re definitely not factoring in anything at the moment. We’re considering the impact of more general bank issues that have been unleashed by the authorities, so the stress tests, asset quality reviews and all that stuff. But beyond these more general issues, we’re definitely not factoring anything specific into our budget.

Matthias Gaab, Deutsche Bank: What crosses my mind is the extent to which volatility has come down over the last 12 to 24 months but recent developments remind us or should remind us that visibility also has come down a lot. Certainly my perspective would be that say six or nine months ago, we all would have agreed that visibility is good but since then it has reduced.

That basically fuels uncertainty into, say, the budgeting process for 2015. We have all seen what has happened during 2014 between the beginning of the year and now. Even though the environment seems to be, as far as the markets are concerned, blue-sky, it is still pretty challenging to have a very specific reliable view on how things will look in the second half of 2015. So from that perspective I think we should probably be mindful of the fact that visibility has come down.

IFR: Ingo what’s on your mind? And if visibility has reduced, will things like use of proceeds when it comes to accessing the capital markets be more of an issue? Do investors really care?

Ingo Nolden, HSBC: Less and less. There will be times where they look at it. The high-yield market has had a bit of a rough ride in recent weeks and some deals haven’t been placed immediately, so you could argue that this is getting now back to normality, which is good.

But most investment-grade investors don’t really differentiate use of proceeds. You may see a new-issue premium, which has been 10bp at the wides but is now 5bp or zero in some cases so that’s less of an issue. Macroeconomic risks haven’t really led to big concerns. We saw a bit of sterling weakness on the Scottish referendum where everybody was taking a bit of a defensive stance.

But I’m still astonished how little the geopolitical risk we’re seeing not too far from our borders is having an impact. The market is so complacent with the liquidity that’s out there that it just doesn’t play a role. That said, nobody really feels 100% secure. There are number of elephants in the room, but so far none has flattened anything.

I look at interest-rate developments in the US, how this decade-long decrease in rates will pan out when the US is moving up and Europe is most likely staying down for quite a long time and how this will actually impact the economic picture between Europe and the US.

Christian Reusch, UniCredit: For me, the competition we’ve talked about is an issue; in fact it’s probably one of the largest factors hindering business. While it is positive on the one side it is sometimes painful. On the geopolitical issues, I couldn’t agree more. Looking back at the last nine months in the bond market, regardless of what happened, the bond market has suffered a one to two-day blip at worst and the bonanza has started again. Probably with slightly wider new-issue premiums but even those have recovered very quickly.

In the grand scheme of things, if you look back and think where economists had predicted where bond yields would be, revising after Q2 and falling completely off the cliff to the levels we discussed earlier, even new-issue premiums at their widest were easily compensated by the decrease in yields so from an overall cost of funds perspective, issuers couldn’t worry less.

From an investor’s perspective, accounts that participated from minute-one onwards from the beginning of the year could have been a little bit more relaxed after the summer lull, because they had seen enormous performance so there was no need to rush. But as things came in even further, they’re jumping on the bandwagon because they don’t want to lose momentum and because there are no alternatives out there.

But in other segments, especially in the high beta world, whether it is high-yield, hybrids or other instruments that pay higher yields, those have also come down and absolute return is massively down. And covenant packages are going lighter, lighter and lighter. At the end of the day you have to make up your mind as to whether pricing is still adequate for the risk you are on-boarding.

These are the main themes we need to bear in mind. And yes, expect the unexpected. We don’t have a crisis banging at the door of the eurozone but the crisis hasn’t gone away and could come back again because unfortunately, with one or two exceptions, not that much has changed.

The ECB is taking measures to further fuel the ability of banks to provide lending, but this is not a problem for Germany. On the question of higher public spending etc to fuel economic growth, let’s wait and see. The overall low yield environment is certainly adding some fuel to that discussion.

IFR: OK to my final question and to something Christian alluded to: are we in a credit bubble?

Roland Boehm, Commerzbank: No.

Joachim Erdle, LBBW: Not yet.

Matthias Gaab, Deutsche Bank: We’re close.

Christian Reusch, UniCredit: It’s coming but it probably won’t be the banks that get hurt this time

Ingo Nolden, HSBC: Not yet, but approaching

IFR: So next year’s conversation could be very interesting. Gentlemen: thank you very much for your comments.

To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3

To see the digital version of this report, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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