IFR German Corporate Funding Roundtable 2017

IFR’s seventh annual German Corporate Funding roundtable, which took place in Frankfurt in early November, found participants upbeat but at the same time pensive and rather preoccupied. It was an unusual emotional juxtaposition.

On deal activity, loan bankers had relatively low expectations coming into the year based on the market’s maturity profiles. But syndicated lending to German corporates actually surprised to the upside in 2017 as a range of companies, multinationals as well as large and Mittelstand companies tapped the market.

What particularly encouraged bankers was the number of medium-sized acquisition financings that emerged during the year as well as the continuation of the trend of small-cap companies tapping the loan and Schuldschein market for the first time. This all provided a modicum of respectability to the loan market in terms of deal numbers.

For the bond market, the issues for German corporates were the same as pretty much everywhere else: it was a year dominated by ECB monetary stimulus and abundant liquidity that kept a lid on volatility to the point where one of the roundtable speakers referred to the year, with an artificially inflated bond market where everything went tighter, as bordering on dull. It was a year that saw German automobile companies account for more than half of all German corporate new issuance.

There was a perhaps over-exaggerated focus by bond market participants on event-risk around European elections and other factors but in the grand scheme of things nothing upset the market. From a borrower’s perspective, it was another year of near-perfect issuing conditions. Those conditions are expected to persist into the coming year, given a ECB gradual tapering strategy that will not create cliff effects and one that has enabled participants to remain constructive on credit.

But for all of the positives, there was an underlying feeling that the bond market might have become too complacent. Anxiety towards market unknowns – MiFID II included – if not a recurring theme was clearly on people’s minds. One speaker asked: is this the calm before the storm? This generalised sense of quasi-anxiety, it was suggested, has led German corporates to maintain a very conservative approach, reflected in a move to reduce overall debt leverage.

From a strategy perspective, on the basis that there is a clear trend for corporates to consolidate their relationship banking groups, there is still a big focus from the banks on ensuring that they remain relevant to their core clients and offer solutions rather than peddle products.

This has resulted in the establishment of corporate finance or corporate debt platforms that are working to adapt to the new normal, where margins have shrunk, products have become commoditised and where financing is no longer a differentiator in such easy market conditions. Creating efficient and relevant client engagement and getting paid adequately for optimal client service is clearly on the industry’s collective mind.