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Saturday, 18 November 2017

IFR German Corporate Funding Roundtable 2015: Part 3

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IFR: Can I ask you for your perspective on 2016, Roland? We haven’t talked about acquisition finance yet but it’s been a fabulous year globally for M&A and banks have been very big providers of M&A liquidity. So when you give your perspective, can you factor in acquisition finance?

 

Roland Boehm, Commerzbank: From a bank perspective, we would love to see more corporate activity, especially in Germany. We’ve had a very good acquisition finance year in EMEA but it’s been slightly weaker in Germany. Germany has many leading global companies so it would be wonderful to accompany them, if they feel the opportunity is right, to realise M&A-opportunities.

So I hope we see more activity in 2016. In Germany, the market has certainly been noteworthy for a lack of supply rather than a lack of demand but there is a lot of demand in the bank space, in the Schuldschein space and in the bond space for the right companies at the right price.

The near future is always a volatile and tricky space. If I think back on what we talked about in this room last year, some of the issues turned out to be issues that we did focus on during the course of the year. But there were some unexpected and new ones as well. I would expect the same thing for 2016.

So maybe not a cloudless sky but certainly a market environment which, in weather terms, is much better than the cold rainy weather we’ve been experiencing of late. I’m optimistic for next year.

 

IFR: Would your expectation be that the competitive element that’s been mentioned a couple of times today and which has kept a lid on pricing stays the same?

 

Roland Boehm, Commerzbank: Absolutely. That’s a very good thing for borrowers, obviously, but it’s a good thing for banks as well. Let’s not forget that banking is inherently a competitive industry and the loans space is extremely competitive. While that may have short-term disadvantages, it keeps the product focused and competitive and ensures that the players are at the top of their game if they want to be taken seriously by clients.

If your aspiration is to play at the top table, that’s a good thing as it encourages innovation. So from bank loans to Schuldschein and the broader private debt space I’m going to watch developments very closely in 2016, keeping in mind that our role is to provide solutions rather than just provide comparables for pricing for established products.

 

IFR: I wanted to ask our corporates then to give their perspectives for 2016.

 

Steffen Diel, SAP: On the funding environment, you used the term ‘window market’ for debt capital markets. I think that’s pretty much what we are talking about. It’s about jumping from one open window to another. I think this will continue, and volatility is here to stay. There are too many geopolitical events with no immediate solutions so we’ll have to live with high volatility.

The very positive thing is that the debt-related interest-rate environment will remain attractive over the next year if nothing significant happens. Navigating the window market environment is a different story for a frequent issuer than it is for a non-frequent issuer. The probability is higher for the non-frequent issuer to have to justify the point of time of the issuance and to explain the new-issue premium to pay.

So this will be a bit of a bigger question in the future. Banks can provide valuable advice and provide arguments that treasurers can use internally to justify a certain issue at a certain point in time.

 

Peter Zirwes, Daimler: We are a regular funder so we will need to come back; there is no doubt about that. The question is – and I think it has already been pointed out by Steffen – that you need to pick the right windows.

In a situation where you have a lot of themes cropping up all of a sudden, we have to err a little on the conservative side i.e. ramping up liquidity a little more even though it’s costly in order to have a buffer for periods when markets are shut.

Unfortunately, the euro market is not as advanced or grown-up as the US dollar market. We’ve seen lately that there are periods of time where there is not really a lot to be done in the euro market. Aside from that, I think the overall picture with liquidity is probably going to stay like that. But as long as we have a fair pricing, we can deal with it.

 

Peter Müller, Bayer: I agree that interest rates are going to stay low. Whether there is a rate hike by the Fed or not, it will not really move the long-term curve. That depends on inflation expectations and there are none. The ECB may even be increasing quantitative easing so interest rates will remain low. Even if corporate credit spreads increase a little, it won’t make our funding that much more expensive.

For us, M&A has been the driving factor for funding in the past decade. In the absence of M&A, we will be able to repay our debt next year from free cash flow. We have no short-term refinancing needs. Unfortunately we cannot look for M&A opportunities just because funding is cheap. It obviously has to be the other way around: you find an opportunity that fits into your corporate strategy and see then how to fund it.

But I would agree with Ingo that the world is not going under and we are maybe exaggerating the China story a bit too much.

 

IFR: If we get policy divergence between the Fed and the ECB/BoJ, how does that change the asset price valuation story?

 

Caroline Brugere, Allianz Global Investors: The market is expecting very little from the Fed; if it does tighten, it looks like it will be minor meaning that the impact on spreads won’t be that much for corporates.

 

IFR: Is there anything else the panel would like to discuss before we close?

 

Ingo Nolden, HSBC: On the political intent from the European Commission around Capital Markets Union and private debt markets, it may be of less interest for large corporates since they’re going to approach the public debt markets, but the private debt market offers liquidity as well and we do see large corporates tapping the private debt markets, be it in Schuldschein or MTN format.

Beyond that, as a general funding topic, China is going to play a bigger role on the funding side. The onshore bond market in China is already the third largest in the world. Nobody really sees it yet because China’s opening process is still gaining momentum but I think that might be something interesting to watch going forward.

How will the internationalisation of the Renminbi unfold? What will it bring? And regardless of weakening growth, 6%-7% is still 5.5% or almost 6% more than we have here. The Chinese government appears to have a very clear path and is following it despite the headwinds because they seem to have a larger plan to internationalise the Renminbi and to change the way their economy works from an export-oriented economy to a more internally growth-driven economy.

That’s going to be interesting from a funding perspective. It’s a market that is growing strongly and of course needs some financial innovation going forward. That’s being worked on.

 

IFR: On CMU, one of Jean-Claude Juncker’s dreams is to have a big EU securitisation market to enable banks to lend more to corporates. Do you buy the story?

 

Ingo Nolden, HSBC: If you compare the European securitisation market with the US market, you would say: “there’s huge potential for growth”. In general, it’s a good idea to say: “Alright, as banks we repack and recycle our capital via the securitisation market.” But when we go into different categories of securitisation, I remain a bit sceptical about the principle-agent conflict that comes with it. Yes, of course there is regulation in place that says you have to have skin in the game.

I often hear about politicians saying: “yes, we want to have good securitisation” but nobody can define what that is. And everybody wants a Triple A that is really Triple A and nothing that is artificially created. In short, I think it remains to be seen. It’s too early even if the overall CMU topic is a good one.

Politicians say: “We have diverse funding markets albeit segregated funding markets in Europe. Now it’s time to look at it from a more coherent point of view”. But this doesn’t really matter for the big corporates we have here; they already have a pan-European funding market. This is more an issue for mid-caps.

 

Peter Müller, Bayer: The coherent EU-wide approach should not take away the advantages of Schuldschein, for example, i.e. lean documentation that works for issuers as well as investors. If CMU leads to standard documentation of 150 pages, this will kill the market. Politicians should be aware of what the advantages of those instruments are,

 

Roland Boehm, Commerzbank: That’s a very important point. While I think more standardisation would be helpful and that’s one of the big advantages of the US market (one currency, one standard; more liquidity as a result), we need to be aware that markets aren’t made by political decree. They arise from investors seeking a particular product and a particular return and issuers looking for ways to provide that exposure. That is based around free enterprise and markets finding the right instrument and finding the right solution.

 

IFR: The political thinking around securitisation is that it’s going to impel banks to lend more. I can see the thinking here but is it realistic?

 

Roland Boehm, Commerzbank: Well certainly not if the credit story isn’t what we’re after.

 

IFR: And that’s the point, right?

 

Roland Boehm, Commerzbank: Certainly in Germany, from top corporates down to SMEs through to the retail business, the issue is lack of demand rather than lack of supply.

As if I may a final point on what Ingo said about China, I’m expecting top borrowers to maintain their profiles in the loan market and in the bond market but I think it’s going to be a very interesting year for niche funding. I think we’ve mentioned some areas, Renminbi to Schuldschein.

I think borrowers will be much more open to exploring new things to the extent that it’s sensible, that it’s competitive, and that it has value. And the wild card next year is the acquisition finance space. There’s no reason why 2016 can’t be a good year.

 

IFR: A really positive point to finish on. Ladies and gentlemen, thank you all so much for your insightful comments.

 

 

To see the digital version of this roundtable, please click here

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

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