IFR German Corporate Funding Roundtable 2016: Part 3
IFR: Have you seen growth in institutional loan carve-outs in syndicate structures?
Dominik Müller, Commerzbank: It’s a good question that has been asked for many years and the answer is always no, we haven’t seen these investors on the corporate side. They have different return requirements in most cases. Corporate financings, particularly in this environment of high liquidity, do not attract institutional investors.
Ingo Nolden, HSBC: What concerns me is it appears that the classic funding route is being cannibalised. Obviously it is not possible to raise €1bn in a day through a crowdfunding platform, so that will not be happening. But there are many efforts to diversify funding sources, through regulation, through political activity – for example in the form of the Capital Markets Union (CMU) and attempts to build a pan-European private placement platform.
Additionally we see investors approaching issuers directly. All these efforts are designed to give SMEs access to efficient markets. This disintermediation of financial market participants has been going on for a long time, but has it been accelerating in recent months and years?
Banks use relationships to maintain their position in the market, providing attractive fees or attractive margins for corporates in order to win ancillary business, including DCM. But it feels like this is gradually changing, banks are losing ground – we know the German and European banking sectors are not the most gold-plated in the world at the moment.
The question is really for the issuer: do you see more approaches from issuers directly, offering to do deals without the involvement of banks? Or do you as an investor value the banking services as a way of out-sourcing diligence, for example?
Michael Schiller, Union Investment: It’s funny you ask that because I asked the same question to some treasurers a while back, about why we need to involve a bank. All the services, including loans, can be arranged on an internet platform. But I assure you: treasurers still enjoy the services of banks.
When issuing bonds on a big scale you need real liquidity. In the Schuldschein market you might be fine with smaller issues but we need big liquid issues. We’ve had discussions about private placements, but the problem is always that we won’t be able to sell them.
If you deal with the company directly there won’t be that liquidity whereas with a bigger bond, involving more investors, there is a market. Looking 10 or 15 years ahead, we could be looking at something different with blockchain technology. There is no reason we have to stick with the traditional bank distribution model. At some point that will change, but it will not be within the next two to five years, it will be a longer-term development.
Regulation will also have an impact on smaller companies and high-yield companies. MiFID II has implications for paid research, which is going to affect the kind of coverage these names get. Who will pay for that research? It probably won’t be clients. It will probably be investors that have to pay for it, meaning it comes out of our fee pool.
It means we’ll probably become more selective on the research we use. That means less research, shallower coverage and less coverage of smaller names and one-time issuers. That means access to markets for smaller and weaker credit quality names will be more limited.
IFR: Is disintermediation a threat, or can it be complementary?
Marc Müller, Deutsche Bank: It offers good opportunities for innovation. I think everything that we’ve seen in the market from the fintech space, and a lot of what has been said today, points to the need for more digitisation of the fundraising chain, and particularly the DCM process. We will increasingly see that being introduced into our market, both on the loan and the bond side.
We should also bear in mind that we are talking about a highly regulated market. Where we can push for more electronification and efficiency that will be a positive for both investors and issuers, in terms of the reliability of the notes generated, and the process. That is clearly a trend that we see occurring across products.
Just look at what has happened in the last couple of years in the FX market. Most of the volumes are now traded electronically. That is not going to happen for bonds in 2017 but clearly that is the path we are on; we will be much closer to it in the next five years. That will be good for all parties involved and could also be good for liquidity.
Heiko Möhringer, BayernLB: Honestly speaking I doubt we will see a Schuldschein syndicate and loan platform in the next couple of years. Every Schuldschein and every syndicated loan is unique, in terms of documentation, in terms of investor base, in terms of maturity and currency mixes, etc. It will be difficult to resolve these problems to deliver it on a platform.
Another thing is that, having spoken to a lot of issuers that have looked at this direct private placement solution with institutional investors, they seem to prefer to choose otherwise if they had the opportunity. They need or want an independent third party to give advice about maturities, financial and non-financial covenants, documentation in general and pricing.
This independent third-party opinion is not given with a bilateral private placement for just one or two investors.
Morris Gutermann, Helaba: German treasurers might be too polite to discuss explicitly why they need a bank but I’ve certainly heard a Swiss treasurer ask it, and suggest that he could post whatever his funding target was over the internet.
The technical aspects certainly weigh heavily on the future, but I agree it will not be changing soon because the traditional relationship is quite important in Germany. The structure of financing, the RCFs as the fall-back for other kinds of funding, all that is heavily dependent on banking relationships. But it is something that we need to watch out for the future.
It might happen quickly following a black swan event. There is always this danger and we have to be creative. In terms of the Schuldschein market, there are a lot of separate components that go into every single transaction. We try to standardise and streamline things as much as possible but for all the discussion we have about it, it has proved impossible to fit it all into one technical, push-the-button way of doing business.
Dominik Müller, Commerzbank: Digitisation is part of the new Commerzbank strategy and is a key subject across the banking market. But the products, be it bonds or particularly loans, are very individual; they cannot be standardised. At the end of the day we are not providing products, we are providing solutions for our customers.
The purpose is not simply to issue a bond or arrange a loan, it is to satisfy the needs of our clients. They have specific needs and we need to address them appropriately. This can’t be done by a single electronic platform, with somebody pushing a button.
Considering a typical acquisition scenario, there’s a need for a flexible instrument at the beginning: a loan, which is provided on a very confidential and quick basis. After that, different take-out instruments will be implemented. It’s all about an overall financing concept, which needs to be tailor-made; it cannot be created digitally.
Banking is still a relationship business. Banks have had relationships with customers for many years. This needs to be taken into account when we discuss digitisation in a broader context. From a pure process point of view, technology can certainly increase efficiency in the future. There is definitely more room for further digitisation. But the essence of our business, I am sure, is fundamentally individual, that will stay.
Ingo Nolden, HSBC: Digitisation and disintermediation are both game-changers. And another game-changer is regulation, be that MiFID II or Basel IV. We will see how the political environment shapes the rules that govern banks. Banks, issuers and investors all know that regulation is here to stay.
Obviously there is a master plan, in terms of the role banks and financial markets should play in the long run. But when it comes to the details it isn’t clear how the parts of this master plan fit together. There are so many cooks in the kitchen.
Having said that, I think disintermediation will be a game-changer. We are witnessing it now. We see issuers coming to different funding markets at the expense of the traditional bilateral or syndicated loan, and thus at the expense of the banks and their interest income. This will continue and will evolve into a totally different banking structure, not only in Germany but Europe-wide and globally.
And it will happen in asset management too. We are witnessing consolidation trends and challenges that the asset management industry faces are in some respects quite similar: How to make money in this changing environment. Is the level of profitability or fees or margins socially acceptable?
That is the game-changer for the entire finance industry and it will play out over the next 10 or 15 years, and continue happening.
IFR: These are fundamental questions and unfortunately we don’t have time to discuss the role of banks. But I would like to talk about sustainable finance. The take-up of Green bonds among German corporates has been very low. Are Germans just not green?
Marc Müller, Deutsche Bank: German corporates are green but the ecological aspect is built in the products or production process. When you speak to a treasurer the question is around what is the cost of the debt tenor in Green versus a brown – ie, a regular bond.
The change we’ve seen, particularly in the first half of this year is the number of funds designated to the Green product in the bond market has further evolved, and continues to grow. When there is no longer a pricing disadvantage, and that includes the incremental effort to establish Green bond status relative to the brown bond, that is when the sentiment in the treasurer’s mind changes.
Does it actually provide additional investor diversification that benefits the corporation? At a certain point in time, which I think we will see in the not-too-distant future, is there is a funding advantage? When reaching that additional segment of investors allows you to raise debt in a more cost-efficient way, that will be a breakthrough, and that is the path we’re going down.
So it’s not that German corporations don’t want to issue Green bonds; they either look at the diversification effect or the funding effect. It is going in the right direction and the Green bond market is growing in Europe. In addition we have also seen a Green Schuldschein this year.
You also need to bear in mind the current environment for euro funding. Green funds are providing incremental capital or diversification which at the moment offers only a marginal benefit. With a different market and a different credit spread environment it would be easier to see the appeal to corporates.
Dominik Buric, LBBW: I like the Green bond initiative. By using these types of bonds it makes it clear to investors which corporates will put money into sustainable projects. There are certainly German corporates thinking about these types of projects, looking for sustainability in their business. On a funding side the challenge is a lack of SRI [socially responsible investing] opportunities.
There is an increasing investor base but it’s not comparable to the whole euro bond market. For a treasurer it’s a question of whether to exclude part of the investor base. And what happens to the bond if the project is no longer considered sustainable by a particular rating agency or sustainability agency that is assessing it.
So there are some issues that need to be looked at in the sustainability bond market. Maybe German corporate treasurers are a bit more cautious than others on this. Or other corporate treasurers are more innovative.
Michael Schiller, Union Investment: Union Investment is one of the biggest ESG investors in Germany and it’s difficult with the construction of Green bonds. We consider the company for its green credentials and then we might invest. If a company is not green but it issues a Green bond, we are not interested in that bond.
Some investors look at it the other way around, but that is how we do it. If there’s a new Green bond, I will compare it with all the other bonds and if it’s priced the right way, and I’m allowed to buy it, I buy it. I would never buy it because it’s green; the company has to fit anyway.
We also see people setting up green funds, designed to invest in Green bonds and nothing else. There is a lot of compliance work involved when issuing a Green bond, a lot of continuous auditing to prove that it’s an appropriate project over the long term. That’s getting expensive. If there is no funding advantage, why do it?
Morris Gutermann, Helaba: We have limited experience in terms of green financing. We did a Green Schuldschein this year for TenneT, a green company from Holland. Three-quarters of its activities are in Germany but it’s a Dutch company.
The company is green overall, so any funding needs to be green. For us at least, it was a very pleasant experience. There were a lot of issues to deal with but in terms of the success of the issue, we gained one investor through the greenness, and lost one, which is probably indicative of this market, being in its early stages.
We’re still discussing it in terms of pricing and efficiency and the what’s-in-it-for-me aspect for treasurers. In the near future it will be discussed on its own terms, not purely in terms of pricing. We’re getting there. We’re quite happy to have a different sort of product to deal with, it benefits the market.
Ingo Nolden, HSBC: Once again, cultural aspects are holding back the green market. There is still the question of what is green sometimes. For example, some German treasurers or CFOs questioned an EDF Green bond because of the nuclear angle. A French treasurer or CFO might see that very differently. Some standardisation has already taken place but still there is some subjectivity in it.
We expect the sustainability finance trend to continue and maybe we will even see deals that allow issuers to print inside their conventional curve, or print larger sizes at a given price. We have seen this selectively, for example on the SSA side.
Earlier in the year we led a €1.25bn Green bond for NRW.Bank at a time when the feeling in the market was there was only appetite for a conventional bond. Such a transaction proves that Green bonds offer better market access as you are able to address a different investor base. You can diversify and these investors seem to be more resilient to market shocks. There can definitely be value in that.
Maybe as we travel further down this road corporate treasurers will see the beauty of this product. But first we must see the right projects, and that is one of the biggest factors – how we get to that point.
Dominik Müller, Commerzbank: We have not seen many of these green transactions on the Schuldschein side so far, only four transactions this year. Those transactions constitute an insignificant proportion of the total Schuldschein volume this year. But I’m confident that this trend will continue to provide some impetus to growth in the Schuldschein market.
We haven’t seen any green loans so far. That is quite easy to explain particularly for large corporates: most of them tap the loan market with large liquidity back-up lines for general corporate purpose. It’s not linked to a specific eligible green project. But it could well be that we will observe it for specific projects of smaller companies in the future.
It remains to be seen whether banks will also be interested in investing in these kinds of eligible green projects financed through a loan. But so far it’s not a big topic in the loan market.
IFR: Would each of you like to make a closing statement about anything we’ve discussed, anything that keeps you awake at night or expectations for 2017?
Dominik Müller, Commerzbank: I think we will see very similar developments in the loan market in 2017 to what we saw this year. Volume-wise, it will remain very much acquisition-driven. On the Schuldschein side the pipeline is filled up with transactions starting in January.
I believe there will be volatility ongoing in the markets, which might create challenges in the shorter term. But overall I’m positive for 2017.
Marc Müller, Deutsche Bank: We also believe the funding environment for corporates in Europe will be bright. We do not expect either the breadth of products available or the funding costs to change materially towards year-end or next year. On the credit side we see stable, if not even tightening credit spreads, though we have to be aware that there are political risks which could cause interim volatility.
We expect that next year the CSPP will be extended. I see no reason for the funding environment to worsen for corporates. We expect M&A to pick up, as mentioned earlier. In the public bond market we should see record volumes, towards €300bn in the investment-grade market in Europe. We do not see why the trend of increasing euro issuance should change in 2017.
Maybe we will see growth in Green bonds as we discussed, and perhaps also in other instruments like hybrids or other currencies. That would provide a stable funding environment.
Michael Schiller, Union Investment: We will be buying bonds next year, I can assure you of that. But I do see risks for next year. We shouldn’t forget that credit markets and trading activity is being supported by CSPP. The central banks need to continue purchasing or it’s going to get more difficult. We must also acknowledge the risk that some companies may not be able to refinance.
The big concern is on the political side. There are a lot of elections coming up next year and that could lead to some periods where markets close. If things go as badly as some expect we will be having more discussions about the future of Europe.
In that case next year is not going to be fine. That’s the worst-case scenario; I do not expect that to happen but we need to keep it in mind so we are not surprised if it does. It’s a known unknown.
Dominik Buric, LBBW: I am also positive. From a loan perspective, general corporate activity should be quite predictable next year. It won’t be a lot, but I’m very optimistic in terms of further acquisition finance activity. General volatility and uncertainty will continue but we have a supportive environment in terms of interest rates and banks are committed to providing funding for solid credit stories, and this will continue. Companies are eager to pursue external growth opportunities because of limited organic growth. These aspects should all come together to ensure we see a good year in 2017.
The Schuldschein market had a record year in 2016, particularly in Germany but also in EMEA where it saw a more than 70% increase. I expect this growth to continue next year, simply because the overall environment and ECB policy should support that, especially for unrated companies, which are the main driver in this segment. So overall I anticipate a successful year in 2017.
Matthias Raab, S&P: From a credit perspective we have a stable rating outlook for most German corporations. We have a slight negative outlook bias overall, but we expect German companies will continue to benefit from excellent access to capital markets and attractive bank lending. We’re likely to see a lot more refinancing and repricing, which will further reduce the cost of debt and support liquidity profiles.
From a macroeconomic perspective there are clearly a lot of uncertainties. We’ll have to see what Donald Trump’s policies will be in terms of trade, and the implications for German export industries, if any, in the medium term. These concerns could dampen investment going forward but it’s too early to tell at this stage.
Ingo Nolden, HSBC: I agree, and when that
happens, the truth usually turns out to be different. I think following the US election some of those risks that seemed remote have now increased. Nobody knows what’s going to happen but the unthinkable looks increasingly possible and it could lead to serious volatility again and questions about Europe and the euro itself. But for now it seems to be contained.
We shouldn’t doubt the central banks because they have proven in the past that they have all the tools at hand to cope with special circumstances. But every policy has its limits. So we can only wait to see what happens.
Overall, the growth dynamics remain intact and liquidity remains healthy. So from that perspective everything is aligned well but usually that is when something happens…
IFR: Gentlemen: thank you for your comments.