IFR German Corporate Funding Roundtable: Part 3
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IFR: How do you see high-yield bonds evolving among German corporates? Is the play going to be issuers selling into the US market, or will it be more of a home-grown affair?
Christian Reusch, UniCredit: I think it’s a combination, at least for the time being. I think the positive is that the high-yield market in Europe has picked up substantial momentum. We shouldn’t forget the high-yield market in the US has a much longer history. So from that perspective there is still some way to go before Europe catches up but we remain very constructive for this market segment.
We’ve seen around €7.5bn out of Germany this year from total supply of around €48bn. There is a certain appealing factor for both sides of the equation, investors as well as issuers, so that speaks for itself. I think this trend is about to continue.
Obviously, and I think this is also part of the positive evolution we’re seeing, people will also grow up a little bit in terms of not only risk appetite but also an ability to deal with it when the heat in the kitchen turns up. In this current market environment, it’s fair enough to feel very comfortable but we have seen other cycles and this will be the litmus test of whether things work out in a way that’s beneficial to both sides.
Matthias Gaab, Deutsche Bank: What we are seeing at the moment and something we should probably reflect on, is the following: probably a year into the crisis, the pricing differential between higher-rated names and lower rates names literally exploded. We have seen a flight to quality, and given that the crisis has receded and we are now faced with an extremely low interest environment, that gap is narrowing again. The lower rated names are now in a position to finance themselves much more favourably, relative to say three years ago, as opposed to comparing the better-rated names in the Single A or better category. The gap has significantly narrowed and is changing the picture again.
IFR: One of the other areas I wanted to touch on is the growth of CLOs and institutional loan funds. There is a lot of talk of, again, not a new topic, but some renewed vigour around disintermediation. Henner, you have your bank group but do you look at alternatives? The funds are starting to get aggressive in getting access to paper.
Henner Boettcher, HeidelbergCement: They’re knocking on our door and we have to compare prices, and that works in our favour. We have seen transactions where CLOs have played a role here; Schaeffler was a very successful with that I think.
IFR: What’s your take on the notion of disintermediation?
Henner Boettcher, HeidelbergCement: It’s continuing. Funds are looking for duration so corporates who can do long-term financing will be the key beneficiary of this development.
Roland Boehm, Commerzbank: The real question Keith, is: is this positive or negative? At the end of the day this is beneficial to the growth of the capital markets in Germany and in Europe. I think we are seeing the continuation of a very healthy trend although I do think the topic of disintermediation between loans and bonds is a bit of an overdone and over-marketed concept.
Particularly for the higher investment-grade end, it is healthy for the issuance of drawn debt to go to the bond market. The capital markets are more liquid, they are wider, they are deeper, and it’s very good, as Henner also said, for corporates and clients to have the benefit of a wider investor group.
What we are seeing – and we discussed this earlier through the Schuldschein market, through the syndicated loan market – is that debut issuers and new companies are coming into the market. We are seeing functioning capital markets. So when you speak about CLOs, it is largely a phenomenon for the leveraged market, and I think that’s a bit of a different discussion from the one about disintermediation.
Matthias Gaab, Deutsche Bank: But what kind of disintermediation are we talking about? Between banks and non-banks? Or between loans and other products? Because on the latter, for example, I think there is clearly a trend for funded money to be raised outside of the loan product. But the loan will always remain there, because it’s the most flexible instrument of all the alternatives we’re talking about.
So from that perspective, banks will always continue to play a role in the lending business. It will be interesting to see what kind of effect Basel III and other new rules have on the provision of committed credit lines which are undrawn.
Lastly, if we look back over the last five to six years, if things become difficult for a company, banks will remain lenders of last resort because, again, it’s an instrument which is very flexible with respect to redoing the capital structure and it’s probably more difficult if you have a client who solely has capital market instruments outstanding.
On the non-bank side, it’s clearly something for the funded portion. Because obviously it’s clear that all the talk of non-banks trying to do business with corporates, where there is no funding around, doesn’t make sense for them anyway.
Christian Reusch, UniCredit: There’s a huge learning curve going on with these institutional clients. I met one recently who told me he’d met with 30 to 50 clients within the last two months and of those, he won’t be able to execute more than two or three. You can argue that that’s a good hit rate but I would say, if you take the time he has invested, he might have learnt a lot about specific sectors and specific regions but at the end of the day, the turn-out ratio is still in its infancy I would say.
The level of sophistication is certainly growing but knowledge transfer takes time. It’s certainly something for the bigger players; a lot of small and medium sized non-bank institutions still have a long way to go because you need research and analysis capacity.
Roland Boehm, Commerzbank: That’s a very important point. Duplicating150 years of bank experience dealing with corporate credit in a country like Germany is hard for any outside investor. I don’t think they are going to get there all that quickly. So they’re a healthy addition to the market and we welcome them. But I am definitely not worried about the loan market and I imagine Ulrich and Christian aren’t particularly worried about the bond market either.
IFR: Conscious of our time, could I ask each of you to summarise your thoughts for the coming year?
Joachim Erdle, LBBW: I think competition remains very high; between banks and non-banks and between loan products and capital market products. For borrowers there is opportunity to pick up the best of all worlds, whatever fits into their strategies. I think from a bank perspective, we need to offer tailor-made solutions and it’s very important is that all of that is based on a trusted relationship, between borrower and bank or whoever the financing partners are.
I think loans will always remain the anchor product. On the other hand, it’s hard to earn money out of loans with margins in, say, the 20bp-40bp area. So cross-sell is a very important topic for us and for all banks.
So we need to compensate for non-profitable loans from a bank perspective and therefore what we try to do is to enter or to deepen strategic discussions with our customers and see what we can do on top of providing loans. This is a very important aspect for us. Are most of the banks doing the same? Yes, for sure, it’s a focus for everybody but it’s important to come up with an integrated approach. This is what we are doing and I think it’s very important.
So we’re trying to build up more competence in the bond area; we’re trying to be aggressive in the loan area; we’re trying to come up with supplementary products, off-balance sheet products, for example. That’s basically what I expect to happen in the next 12 to 18 months.
IFR: You said at the beginning that your focus is the Mittelstand?
Joachim Erdle, LBBW: Well, we do everything. We start with €20m structured loans for small caps and end doing business with DAX corporates, so there is a broad focus. But our core focus is the Mittelstand.
Matthias Gaab, Deutsche Bank: We are expecting growth to continue, barring any unforeseen event. We continue to believe that growth rates in the US and in emerging markets will be higher than in Europe. But as we said before, given that the German corporates and the German industry is pretty much export orientated and globalised, we will see continued demand for financing, looking into 2014.
We think there will be a continued benign environment with respect to credit risk, which will probably continue to result in a low margin environment. The question, which is very difficult to answer, is: will new lending outstrip repayments? So basically what does this send to your overall margin income from the loan book and what does this send to the banking sector as a whole, if say, lending income reduces over time? That would certainly be an interesting question.
But I think generally, we will remain positive in that regard and I believe that this would then lay the foundations for growth, both in the loan and well as in the debt capital markets, from a German corporate perspective, for increase in volumes in 2014.
Ulrich Hoeck, Commerzbank: I think banking in Germany is a good place to be. Germany is a rock-solid business, especially on the corporate side. I wanted to mention a couple of things. One thing I’m a bit worried about on the regulatory is what’s going on in Germany and the EU with regard to retail investors. One of the strengths of our market was access to the retail investor. All money is ultimately retail but I don’t think they are sitting at the table, and if I look for the restrictions banks face in order to talk people into products, there is a disconnect and that may be a challenge going forward.
Another thing, we are living in a country where a lot of goods and services are exported, which means that we also have to think about other currencies. As I said at the beginning, we are benefiting here as bankers and also as corporates from the fact that we can easily get all things done in the euro. But we shouldn’t forget about the connectivity to other currencies.
IFR: You mentioned retail investors and the regulation around that. Investor protection is a reasonable objective, but was there a hint that you think it is going a bit too far?
Ulrich Hoeck, Commerzbank: I think it is always good to have multiple investor profiles in allocation. If you only have institutional investors in, they all run in and out along the key market-making opinion, which is available to them for free or by paying or being on the research list.
I think we simply have forgotten about the retail investors in the bond market and we have to find ways to get them, because there is a lot of money available. But if this money is only channelled into the various products through funds, then we’ve got a completely different decision making, and nobody tells me that one is smarter than the other. I think we need multiple people at the desk.
IFR: So what’s the view from Munich?
Christian Reusch, UniCredit: From my perspective, I think 2014 will be a fabulous year, not only in Germany but also in Europe. There is certainly some work to be done but I think a lot has been addressed and now it’s just keeping the right pace.
I think we will see further granularity, both in terms of investor diversification as well as in new issuers coming to the market. I think this trend will continue for all market segments, whether it’s high-yield, whether it’s investment-grade or Schuldschein, I think we will see robust supply, probably not with double digit growth rates but at least at the same level as this year, maybe slightly higher. I agree also that hybrids will play a role.
So all in all, and as this low yield environment looks set to continue for quite some time. I think people will have to make up their mind, and at the end of the day it’s just a question of how long is the bond market as attractive as it looks like at the moment for people to put their money to work.
Paul Kuhn, BayernLB: So much has been said so it’s difficult to say anything new. I agree that we won’t see additional liquidity going into the bond market but by contrast the DAX has continued to hit record highs without any real increase in profitability. I expect we will see continuous growth there. Investors will look to equity rather than debt.
I see also two trends in regard to the development of the banking sector and relationships with the corporate world. There is going to be continuous focus on relationship banks. Where a company had 30 banks in the past, they’re going to be focused on a more limited number, say 15 or 20, meaning a 10, 20, 30, 40% reduction.
We will also see solid companies add a DCM financing pillar. That’s proved to be the right direction because they’ve been able to find better pricing. Companies have concluded that there is a future for a stable DCM pillar in addition to their base financing.
Last point, in regard to my expectations for 2014, I think that there will be an increase in M&A and that will hopefully will lead to increased demand for financing. Companies see a good environment, they see that they will get inexpensive money and will want to put it to work whenever it makes sense. I expect 2014 will turn out to be the right time to do so.
Roland Boehm, Commerzbank: I’m bullish on Europe, I’m bullish on Germany as the economic powerhouse of Continental Europe. I think that it’s going to be a great year ahead. The one thing I would like to put into the equation is 12 months is a long time in capital markets. So, expect the unexpected. My advice to borrowers, large and small, is use markets when they are open. They don’t get much more open and much more competitive than this.
IFR: Henner, final thoughts?
Henner Boettcher, HeidelbergCement: I agree with what has been said around the table. Obviously it’s good news for me. I think we are in a very fortunate position as German corporates, that we have the benefit of aggressive pricing, aggressive structures and low margin environment. But we also have the choice of whom to work with in our banking group depending on our geographic footprint, our counterparty risk requirements and the product environment. Being a German corporate treasurer right now is a good better place to be.
IFR: Gentlemen, thank you for your insightful comments.