Is Germany in a credit bubble, participants were asked at IFR’s 2014 German Corporate Funding Roundtable in September. It was the final question at the end of a thoughtful and insightful discussion. The cascade of answers was enlightening: “no”, “not yet”, “no, but it’s approaching”, “we’re close” and “it’s coming and it won’t be the banks that get hurt this time”.
On the basis of weighted average sentiment of our five senior bankers, it’s clear that the risk-return scenario for investors and the tension between financiers and their clients are seen as out of whack, and even though no one foresees any distress as it pertains to Germany Inc, there was a feeling that something would have to give.
German corporate treasurers have never had it so good. Large-cap corporates in particular have been able to tap bond and Schuldschein markets; bank lenders have pulled themselves firmly into the game; and borrowers have US private placements at their disposal as well as their burgeoning Euro-PP and GPP cousins. At the same time, institutional investors have donned their direct lending hats and are actively approaching corporate on the origination side.
With so much choice, margins, spreads and yields have ratcheted in through the capital structure, across the credit spectrum and along the curve. The competitive landscape has become very tight and it’s becoming harder for financiers to make money. That’s not a trivial point: at the end of the day, lenders of whatever shade have to generate a positive return,
Bankers at the roundtable did say they were working smarter with clients, leading less with product and more with solutions. Their strong belief is that their ability to understand clients holistically and turn around quickly with creative and innovative solutions where these are needed will always put them at the centre of the client relationship piece.
One of the problems is that providing back-up facilities for German investment-grade multinationals doesn’t put food on the table for banks with budgets to make. A lot of the refinancing out there has been done and corporates have pre-financed as much as they can to lock in fabulous levels. Bank lenders in particular have to rely on ancillary business to make budget and that’s been in short supply.
Which is why the emergence of better volumes in German M&A and a hoped-for uptick in LBOs are both being welcomed with open arms. German M&A this year has had its best showing on a volume basis since before the global financial crisis.
It’s about time: German corporates have been piling cash onto their balance sheets and will need to put cash to work; shareholders are becoming increasingly fractious at the lack of activity. The indications are that with a good following wind, activity will pick up. But with competition for targets between domestic and international trade buyers, financial sponsors and family offices pretty hot, assets are going to come to market fully priced.
One thing is for sure: bidders won’t suffer from a lack of acquisition financing. M&A will continue to be bank-financed through the initial period with the bond and institutional markets more than ready to fund take-outs. Of course the push and pull of divergent US Fed and ECB/BoJ monetary stances and the impact of US rate normalisation have, as one speaker said, reduced visibility even if market volatility – at the time of the roundtable in September – had been relatively benign.
To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3
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