IFR German Corporate Funding Roundtable 2015: Part 2

IFR: Peter, how much do you want to get involved in the name-by-name allocation of your bonds? And if you are in the market that regularly, would you consider direct issuance in specific circumstances?

Peter Zirwes, Daimler: Let’s put it this way, a functioning market definitely has its advantages. The broader the market is, the better it is so I would say a functioning market with banks as intermediators is very helpful, just as we experienced in the past. But things have moved on and, as we have already discussed, this has been brought much more into question to the point where we are indeed thinking about getting more direct access to investors.

And potentially further down the road to make more and more direct investments. Is that the end solution? I’m not so sure but whether we like it or not that may be the end result. The solution may also lie in technical solutions like further digitisation. Maybe the ideas that are spinning around will improve the process. We’ll see.

How much do we get into the nitty-gritty details of an allocation process? To be honest, not too much. For me the general direction is important. You say: “I want to have the bonds allocated to safe hands”. We have occasionally seen more speculative hands in the market but that’s definitely not what we are interested in.

Peter Müller, Bayer: It’s pretty much like Ingo said, that as a frequent issuer you might have more of your own ideas about allocation. For us as a non-frequent issuer, or an M&A driven issuer, we very much rely on the banks’ judgement on investor quality. But I can confirm that the process is very transparent. We are asked about our views on allocation and, following a discussion, it’s something we finally have to sign off.

Roland Boehm, Commerzbank: Peter made a very important point a moment ago, and that is the breadth and the depth that we have in markets and the availability of investors. We need to remember that companies change shape and sometimes they change shape very quickly in both directions.

Investor education, contact with investors and the availability of those investors plays a huge role in companies being able to access and utilise various markets – the loan market, the bond market, the Schuldschein market – quickly and intelligently. And so, most corporates that I see do take an interest in the investor base to ensure they have that access when and if they need it quickly, effectively, efficiently and at a good price.

IFR: Roland, let me stay with you. I wanted to move the conversation onto the issue of relationship banking and related to that the issue of pricing discipline. The traditional model was that banks gave the lending piece at below market cost on the basis that they would be compensated with ancillary business.

The more nuanced part of the story is banks making tougher decisions today around who they bank and how they monetise their clients relationships in a world where revenue generation has given way to a focus on returns.

Can you bring us up to date about this whole construct of relationship banking, relationship pricing and ancillary business? How does it work today and how has it changed since the end of the financial crisis?

Roland Boehm, Commerzbank: It’s just become more professional since the crisis. Few corporates – and certainly not the three around the table here – suffer from any lack of supply of banks. I think they select very carefully which banks add value to their businesses and which they can use in the long term.

Peter talked about who was able to service him with what and where. Getting into a banking group is already competitive for banks, particularly vis-à-vis the premier corporates like the ones around the table here.

Once in there, pricing for me is a technical matrix like many others. The right price needs to be on the box when the item is put in the shelf but professional treasuries are well aware of the dynamics. Certainly in Germany, corporate pricing is generally the result of intense competition. However, corporates are also fair in ensuring that the relationship equation works for both partners.

One of the core takeaways from the crisis is that you want a well diversified bank group to be there when you need it. And banks are long-term partners. We’ve known all three of the corporates around this table here for decades, if not over 100 years, and are very proud to be in their banking groups and to be able to work for them wherever we are competitive and can provide the service.

IFR: So the product has a price when it goes on the shelf. But if you’re selling a basket of products, isn’t it about the blended price?

Roland Boehm, Commerzbank: Relationships are defined individually between a client and its core partners. If that relationship didn’t work, those partners wouldn’t be there. The fact that they are and that they compete to be there is an indication that the equation works. It’s a different formula for every bank with every client.

IFR: Peter, is how you manage your banking relationships a core theme?

Peter Müller, Bayer: It is. I completely agree that you have to have a long-term fair relationship because you need the banks more in some years than in others. So what we do once a year is draw up a profit and loss statement from the banks’ point of view and we include all of our business: the fee business from M&A, pension asset management, treasury and corporate finance and then try and ensure that over the years we have a fair fee spread among our relationship banks.

The Merck Consumer Health acquisition financing was a very transparent process. We invited all our global relationship banks to participate in the bridge financing and told them upfront how much they were going to earn minimum in the take-out. That was very much appreciated by the banks.

It was a very fair process, and everybody got their promised share in the end. With regard to different take-out instruments, we used those banks as active bookrunners that we felt were best in a specific segment. The fee was spread very widely: we had around 27 bookrunners on our bonds but it was a fair way of letting our banks participate.

IFR: Have you massaged down the number of relationship banks you deal with?

Peter Müller, Bayer: It has remained pretty constant since we put our back-up line in place in 2002. It’s been always between 25 and 30. We don’t kick banks out when we renew the line but we don’t actively ask new banks to join in either.

Roland Boehm, Commerzbank: If I can jump in here, this issue of making banking groups smaller can have disadvantages. If you take a look at companies like Bayer, Daimler, or SAP after the last acquisitions, these are really global companies. They have global needs. I think you alluded to it earlier but banks’ business models are changing as well.

So while everybody before the crisis acted like they were good at everything at the same time, certain banks are better at some things than at other things. Global companies need larger bank groups to take advantage of the things that they need globally from various players. So I think that’s a perfectly normal size for a banking group, if I may say so, for a company like Bayer.

Peter Zirwes, Daimler: The club of banks in our syndicated loans is growing. Being in a much broader and more global world has found its reflection so our banking group has changed quite a bit over the years in such a way that in the markets that are new to us, banks are also represented in the syndicated loan.

In general, we follow a very similar approach to Peter. We monitor our group on a very regular basis. We assess what kind of commitment we get from the banks and what ancillary business we have. And we try to monitor that over the various treasury groups and facilities worldwide.

It is important that we have a fair approach. That’s always what we tell the banks. We want to be fair. We reflect what they give us on the one hand but what definitely needs to come on top of that is they also need to be competitive. When we do certain transactions, they need to be in a position to deliver.

Steffen Diel, SAP: It’s pretty much the same for us. We try to track the performance of our bank group on a regular basis but it’s not an easy task, I have to say. However it’s fruitful for both sides. For example, when we look at our foreign exchange business, we evaluate the statistics available on the 360T trading platform. If banks move dramatically in the rankings, we proactively approach them to discuss it.

Sometimes the banks tell us: “well, with those margins, we don’t want bigger volumes”, and that’s fine. It’s all about transparency. It’s all about fairness. We look at the proportion of overall debt, or syndicated lending they provide. And then we compare that to the percentage the bank has on the treasury business.

If that deviates significantly, we try to bring it back into line. That’s the approach. It’s about fair allocation. But if the banks tell us: “well even with that fair allocation, I don’t earn a sufficient yield”, we have to say: “I cannot manage the bank’s cost-income ratio, but what I can manage is a fair allocation of my treasury business”. I think the banks in our core bank group can work with that approach.

IFR: Roland’s point was an interesting one, which is that banks’ business models have changed. Whereas before the crisis there were, say, 20 players that purported to be global geographically and by product, that’s clearly no longer the case. The banking market is fragmenting as banks exit countries, exit products and downsize. It’s not your responsibility to keep up with that but is that a conundrum for you?

Steffen Diel, SAP: We are heavily impacted by that but not so much on the financing side. If you look at global transaction banking, the strategic moves we’ve seen from some banks are heavily impacting us when we talk about our global cash management structure. You need to cover your regions by at least one bank, and then you need to have one or two alternatives in place. So those strategic movements are really heavily impacting us.

IFR: I wanted to talk about what the next 12 months hold in store for us. Caroline, I mentioned at the beginning of this conversation all of the headwinds out there: the tighter external environment, bond and currency market volatility, and emerging markets potentially exposed to financing gaps. What’s on your radar screen with regards to 2016?

Caroline Brugere, Allianz Global Investors: I can only agree on the volatility issue, and EM is a key risk that we monitor. That said, I’m quite constructive on credit, because we are seeing some recovery in Europe and the US is still in growth mode. So it’s a constructive view but I’m very selective.

We are very carefully monitoring the geographical and market exposures of the companies we invest in. That’s the basis of our credit analysis. Referring to the debt structure, that’s of increasing concern of investors given the volatility we’ve been seeing in issuance for the last two years now. So understanding how the corporates hedge; whether it’s a natural hedge or whether there’s any hedging with counterparties. These are the key points.

IFR: We have been seeing some credit spread widening, and markets have been uncertain about when to price in a Fed rate increase. What’s your general view on credit spreads?

Caroline Brugere, Allianz Global Investors: In terms of credit spreads, we think there are some interesting pockets in the market. By the end of the year, I don’t see massive widening. Obviously we saw some volatility in September as well as the return of idiosyncratic risk, with the Volkswagen issue but we don’t see massive widening.

IFR: Ingo, what’s your market view?

Ingo Nolden, HSBC: Life goes on and we will all cope with the challenges at hand. Looking backwards and taking some lessons for the future, it was never more evident this year we were in a front-loading cycle. We have three corporates around the table that have pretty much front-loaded this year.

Bayer was very smart with its [€1.3bn 60-year] hybrid that priced earlier in the year at a 2.5% yield and did its funding very early. Daimler, even though it’s a frequent issuer, has pretty much pre-funded.

Borrowers always hear from bankers: “do it now because there are difficult times ahead”. This time around, it was very much the right approach. Following the end of the ECB QE story at the end of March, the focus shifted to the renewed Greece situation that led to some slight credit spread widening but didn’t really derail the market on the investment-grade side.

Then in summer we had concerns around the US and emerging markets (Brazil, Russia, China) and now, especially for the car companies, we have ‘Dieselgate’. That is driving out spreads. But on the flip side, we’ve seen more investors saying: “there wasn’t any value in the market but and now I see some value coming in”.

I remain optimistic. Liquidity is there. Technically, the picture remains very strong. It’s just a question of adjusting expectations from the issuer side to investor requirements. We’re in a ‘find your way’ scenario where we need to find the clearing price again. We don’t really know where the clearing price is for specific deals, but deals can and are getting done.

As a house, we have drastically reduced our rates forecast. At the end of 2016, we see the Bund at 0.2% and US Treasuries at 1.5%. So the basic story is: rates stay low for longer. That should play very well into issuers’ hands, even if credit spreads increase. One issue I wanted to bring up was the issue of credit risk, which in my view, has been ignored over time. When we got the Glencore story on the commodities side and Dieselgate, investors woke up to the fact that even IG credit bears some risks.

For investors who thought credit was a safe haven while SSAs and financials were difficult asset classes, that was new. We all know times when it was the other way around and some of us scratched our heads when we saw banks trading three times as high in credit spreads relative to corporates or even SSAs.

So it’s adjusting a bit but it’s a healthy development in that people are taking a step back and asking: “where’s the risk? What am I going to see”? We’re going to remain in a low-growth environment with some potentially drastic geopolitical or other news flow. Who knows? But it’s always been like that; it’s nothing new. We need to deal with it and find solutions. Borrowers need to get the liquidity and banks need to be there to help them to get the best liquidity and the best products that are available for them.