IFR German Corporate Funding Roundtable 2025
KEITH MULLIN, KM CAPITAL MARKETS: WELCOME TO IFR’S GERMAN CORPORATE FUNDING CALL. THIS CALL IS TAKING PLACE NEAR THE END OF A VERY ACTIVE YEAR AND ONE REPLETE WITH MARKET AND MACRO EVENTS AND PLENTY OF EVENT RISK. I WANT TO START OUR DISCUSSION WITH A REVIEW THE YEAR, FOCUSING ON THE KEY TAKEAWAYS REGARDING CAPITAL MARKET ACTIVITY AND PERFORMANCE, WITH A SENSE OF HOW YOU’VE ENGAGED WITH THE CREDIT MARKET OVER THE COURSE OF THE YEAR.
THERE IS ALWAYS A HOST OF MOVING PARTS WHEN IT COMES TO ASSESSING MARKETS BUT THE YEAR SEEMS TO HAVE HAD MORE THAN ITS FAIR SHARE OF EVENTS TO DEAL WITH, BE THEY GEOPOLITICAL, POLITICAL, ECONOMIC, MONETARY, MARKET-RELATED AND ISSUER-SPECIFIC.
MICHAEL, IN TERMS OF THE EUROPEAN INVESTMENT-GRADE PRIMARY CREDIT MARKET, CAN YOU GIVE US A BRIEF PERSPECTIVE AS AN BOND ORIGINATOR OF HOW YOU THINK THE YEAR HAS GONE?
Michael Mueller, Commerzbank: I think 2024 developed quite well. We saw an increase in corporate issuance, a broad range of issuers in the market, some long-duration bonds, and hybrid supply. All in all, it was a very good market.
KEITH MULLIN, KM CAPITAL MARKETS: IT’S ALSO BEEN QUITE VOLATILE AT TIMES. HOW DO YOU THINK THE MARKET HAS DEALT WITH THE NEWS FLOW AND EVENT RISK?
Michael Mueller, Commerzbank: There are always situations where markets are volatile but I think investors and issuers have learned to deal with situations.
Max Berger, DWS: An interesting change is that we’re probably getting better data on how primary markets are behaving with a lot of new data points that have given us a better feeling. The past year was one of the most issuer-friendly years if you compare it to the last couple of years. Some of the structural patterns changed and new issue premiums were almost zero for months, so historically low.
We moved to stronger price revisions in new issues from initial price thoughts. In previous years, we were maybe 20bp–25bp but we moved to 30bp–35bp and saw some M&A transactions leading to record books. Over the year, the patterns were quite normal. The only outlier was probably January when there was a lot of supply, especially on the financials side. But generally it was a really issuer-friendly year.
If you look at how credit spreads behaved, they remained quite linked to events. When spreads were tight, the spikes were a little more volatile. The French elections in June and July led to a spike, as did the unwind of the yen carry trade in August. But they corrected quickly and liquidity was good. The market is quite efficient at finding clearing levels pretty quickly.
Henryk Wuppermann, E.ON: January was certainly a very interesting month. Markets were unsure about what might be coming as we’d seen a significant decline in yields and credit spreads in December 2023, which had somehow to be caught up with in January.
It obviously proved to be a very active month, with some transactions going very well and others not so, depending on how issuers adjusted to this catching-up process from the thin trading environment the previous month.
We also had bankers telling us: ‘Well, there’s [Donald] Trump and the US election coming up so you need to get out as early as possible and issue everything in the first half’. Actually, many issuers did that. And reflecting on how things turned out, the US election didn’t have much of an impact on markets. But because of the uncertainty about what might have happened, you had lots of issuance in the first half, primarily from frequent issuers.
In the second half – this is how I saw it but Max and Marco can probably talk better about this from the investor and syndicate perspective – we saw a greater supply from less frequent issuers, or issuers that had difficult stories and which needed more explanation to improve investor familiarity.
But overall, I agree with Max, the market environment was very positive over the past year, even with all the changes in the political landscape or in the economic situation, which didn’t really filter through to the market. My read on this is that it was in part because there were lots of inflows into fixed income and those funds had to be invested.
How does that fit with what we did in the market? We set out early in January and were positively surprised by the continuous support the market received, so we did another transaction in March, quite soon afterwards, which we don’t normally do. We then used another opportunity in August to continue significant pre-funding for 2025.
In August we were all waiting for the US election and were uncertain about what was going to happen so we took the decision to do some pre-financings. We have an issuing range of €3.5bn–€5bn per year. We were shy of the upper level in 2024 but we stuck with the range; it just contained significant pre-financings.
What we also did – and this is a theme for many issuers – was diversify our funding. We don’t just do euro benchmarks. In the past, we’ve done Swiss francs; in 2024 we issued in Norwegian kroner and did a yen private placement. You’ve seen a lot of issuers going to different markets to broaden their investor footprint.
In terms of what I feel is important, at least in terms of messaging when I speak with investors, is we have this talk of a wall of issuance from utilities due to the energy transition, which means a lot of utilities have heavy capex needs. What we try to show investors is that we stand out in a positive sense because it’s not just a question of funding; you also need to have the debt capacity.
Our company is different from many other peers in the market that also have capex plans. As an investor you want first to see the company having the necessary debt capacity before you support their funding. We have that debt capacity.
KEITH MULLIN, KM CAPITAL MARKETS: MARCO, CAN YOU GIVE US SOME PERSPECTIVES AROUND THE EURO INVESTMENT-GRADE CREDIT MARKET, IN TERMS OF ACTIVITY AND PERFORMANCE, AND PICK UP ON THE INFLOWS POINT?
Marco Stoeckle, Commerzbank: I want to go back briefly to 2023 and the year-end rally that really set the scene. If you go back to late October 2023, we had spreads at much higher levels and it had become very clear that central banks were done and that their next steps would be rate cuts. Clearly, the market was a little exuberant going into the end of that year but we saw a massive rally in spreads and yields as Henryk pointed out.
Since then and over the course of 2024, we moved sideways to slightly wider in terms of spreads. But fear had been taken out of the market and we had certain guidance not so much in terms of what the terminal rate would be or when exactly central banks would act. From a longer-term perspective, that is not of so much importance for credit investors but the direction is. That was decisive and it really triggered the cascade of inflows that Henryk mentioned, which started then and carried on through 2024.
Even though we saw some significant back and forth in yields, with investment-grade senior yields fluctuating in the low-to-high 3% area, what is important is that yields were still attractive, on a 10 to 15-year view, to keep those inflows going. The carry proposition was still attractive and a lot of the fear of rates rising further, with consecutive mark-to-market losses, was taken out of the market.
The carry proposition was still juicy enough and the outlook became friendlier. That really made for robust underlying dynamics where investment-grade credit especially could attract steady inflows throughout most of 2024. And that supported the absorption of the new paper and the healthy issuance volumes.
The other observation I want to make as to why primary markets were very busy and paper was well absorbed is that although net supply was not super low, it was fairly digestible because redemptions rose significantly. The market structure really changed due to this rise in redemptions on the back of those first QE tranches falling due and being rolled over. That meant that turnover in the primary market increased. Paper is easier to digest if net supply is lower, or if gross volumes keep rising but are just a reflection of redemptions.
On the other hand, it means a given issuance window is still going to be busier than in a market with half the steady state run rate. And that means, especially with the event risks that we had in 2024 and will likely continue to see, that the stop-and-go funding markets we saw will remain a theme because the market just isn’t as crowded. That’s something we saw in 2024 that I think is going to stay with us.
Max Berger, DWS: We definitely need to talk about real estate because it’s the elephant in the room. Henryk, you made a good point that lower-rated issuers or issuers with more difficult stories were able to print. Real estate is a very good example, which has been the best-performing sector. A recovering primary market was helpful in this respect. Certain German issuers obviously benefited from this quite a bit. That’s a very important point.
I also want to highlight the theme of inflows. The game-changer in 2024 was the reemergence of maturity funds. We’ve been tracking the data and the flows into maturity funds, be it primary or secondary, were probably the biggest game-changer in terms of flows. It did help that issuance maybe wasn’t as long as it has been although throughout 2024 we extended a little, but that’s definitely one of the highlights in terms of flows.
KEITH MULLIN, KM CAPITAL MARKETS: CAN YOU PICK UP ON THE COMMERCIAL REAL ESTATE POINT?
Max Berger, DWS: Commercial real estate is really complicated because it means so many different things. If you take, say, office property in Germany and France, or logistics, depending on where you look, a lot of the valuation adjustments have been completed. Some of the listed real estate companies had peak-to-trough valuations of 15%–20% so you never quite know where it’s going but it feels like a good amount of adjustments have been done in some sectors and a lot of investment-grade balance sheets coped well. Then you have the type of commercial real estate that’s on bank balance sheets; some of it US, some of it European. The large banks have also coped really well with it.
We’ve been really concerned about Nordic real estate, and we’ve seen a couple of companies struggling quite a bit. Valuations generally have probably found a bottom but then you look at Nordic banks, you didn’t see much of an impact of that stress in their balance sheets. How we look at it now and looking ahead, it isn’t a systemic concern for us at this stage. There are maybe properties in second or third-line cities where valuations still need to adjust, but is that a problem for IG issuers at this stage? We don’t think so.
KEITH MULLIN, KM CAPITAL MARKETS: MICHAEL, I WANTED TO COME BACK TO YOU ON THE POINT HENRYK MADE ABOUT THE SELLSIDE PUSHING ISSUERS TO ISSUE NOW, SPECIFICALLY IN THE CONTEXT OF UNCERTAINTY ABOUT WHERE RATES ARE GOING TO GO. HOW DID THAT UNCERTAINTY PLAY INTO SENTIMENT AMONG CORPORATE ISSUERS?
Michael Mueller, Commerzbank: As Marco pointed out, we had a market where credit spreads traded sideways over 2024 until the point when they increased in an environment of decreasing deposit rates and swap rates. Overall funding conditions were more attractive on a yield basis than they were the previous year.
At the end of the day, issuers have to take the specific size they want and think about spreading it over the year and accessing the market on several occasions and picking the optimal points and windows. When they go out, they can, of course, use hedging instruments to manage short-term volatility but you have to get along with the circumstances that are in the market. That’s what issuers do and it’s worked well.
KEITH MULLIN, KM CAPITAL MARKETS: WAS THERE ANY SENSE OF ISSUERS DELAYING?
Michael Mueller, Commerzbank: What Henryk mentioned was interesting in terms of what happened pre and post the US election. Everyone was expecting to go out as early as possible before the early November window because volatility might increase, and we’ve seen a lot of supply since. We saw very solid developments in terms of gross supply from the corporate market that continuously increased and wasn’t really that different from years before; in fact issuance was even higher.
Marco Stoeckle, Commerzbank: We saw frontloading not backloading because strategically there was a steep increase in scheduled maturities that started a few years ago and continued. And we had some very well-known event risks. That meant that all issuers, having learned from previous episodes, like [the mini-banking crisis of] March 2023, erred on the side of caution, especially where they had funding needs. Not all issuers have the same flexibility in stretching it out with when they come to the market.
Regular issuers obviously have more flexibility, especially those that access different markets and instruments. But in general, there was a tendency for frontloading. There was always the option, bearing mind the risk of the November funding window potentially disappearing depending on how the US elections turned out, that if everything went well, the market would gain an additional funding window. In fact, that was what materialised and gave issuers the option for a potential pre-funding for 2025.
The risk of having to lock in higher coupons if rates fell further was, as Michael said, easier to manage than the risk of not having market access because of volatility. It’s a bit of a trade-off.
KEITH MULLIN, KM CAPITAL MARKETS: HENRYK, YOU TALKED ABOUT THE FACT THAT YOU DON’T JUST DO EURO BENCHMARKS, YOU LOOK AT OPPORTUNITIES IN OTHER CURRENCIES WHERE THEY MAKE SENSE. WHAT ARE THE KEY DRIVERS THERE? IS IT PURE ARBITRAGE OR IS IT MORE STRATEGIC DIVERSIFICATION?
Henryk Wuppermann, E.ON: It differs by issuer. You have issuers that operate in various markets and need funding in US dollars, sterling or whatever currency because they operate in those countries. We operate more in the euro space, so our funding and capex is euro-based. If we raise capital in other currencies, it is really to diversify our investor base.
We want to make sure that non-euro investors also have the opportunity to buy E.ON bonds, which they may prefer to do in different currencies. It also reduces the amount of funding we need to do in euro benchmarks. In terms of pricing, I’m very open. We always look at funding on an after-swap basis and compare this with a new issue in euros. We don’t necessarily want to engage in arbitrage but we also don’t want to pay up.
Marco Stoeckle, Commerzbank: A lot of market participants spend time trying to forecast supply numbers and a lot of metrics have become fairly stable and sometimes you see the sector mix changing. One wildcard is always M&A, another is issuance by US companies in euros.
[For example, there was a spike in supply from the pharma sector, which is typically a dollar funding sector because even European companies have a lot of dollar exposure. It’s also a sector that brought some duration to the market, and a lot of high-quality ratings as well. Euro-denominated bond issuance from the healthcare and pharmaceutical industry was 83% higher in 2024 than the previous year. Euro issuance by US companies in the sector accounted for 38% of the 2024 number, meaning issuance by US pharma companies in euros rose by a factor of 7.5 year on year. Roughly one-third of the sector supply in euros came with maturities beyond 10 years.]
[Euro-denominated bond issuance from the healthcare and pharmaceutical industry was 83% higher in 2024 than the previous year. Euro issuance by US companies in the sector accounted for 38% of the 2024 number, meaning issuance by US pharma companies rose by a factor of 7.5 year on year. Roughly one-third of the sector supply in euros came with maturities beyond 10 years.]
Cross-currency swap dynamics also play an important role. On the swap-spread volatility we saw in 2024, there are a lot of hypotheses as to why it happened and what it meant for issuers. I call it spread confusion because as an analyst it was a gift that kept on giving throughout 2024 in terms of the need to explain the difference between spread metrics, especially the way credit investors are conditioned to look at rising or falling swap spreads.
For old-school credit investors, swap spread volatility has always been a measure of systemic risk, but that clearly was not the driver this time.
We believe the drivers of swap spread dynamics were more technical and driven by changes in collateral dynamics and the fact that Bunds are no longer in short supply. Collateral scarcity, especially in the Bund market, was a key feature of the QE era. Now we have very different issuance dynamics in the sovereign space. We have a lot of supply; we have quantitative tightening, which has been a sea change that has driven swap spread dynamics – much more so than an erosion of German sovereign or credit quality per se.
We have very different supply assumptions but it’s not a deterioration of the Bund profile versus the rest of the world that justified swap moves. It did change a lot of relative-value considerations, especially in the upper high-grade space. If you look at a Single B name, where the spread is the bulk of your carry, it’s a very different discussion. But if you look at an Double A name, where the spread is in the low double-digit area, a swing in swap spreads by 20bp–30bp changes a lot of things.
Then you enter a discussion about whether a corporate should trade inside its sovereign or whether that is sustainable. That depends on what sector that firm operates in and whether it’s a multinational or not. Then you have relative value against SSAs and covered bonds, which for many investors are zero risk-weighted assets. From a capital perspective, that trade is even more important, although not all investors are active in both markets.
There are many layers and facets but clearly it created some confusion because for some investors, spreads tightened in 2024 and for others, they are flat to slightly wider. This also factors into discussions about whether credit is cheap or not. My view is that credit is expensive, in varying degrees; it’s more a question of whether credit is very expensive or just slightly expensive.
The more you move into the high beta world or into lower-rated environments, the more expensive the market is. That has implications. One question is whether this was sustainable. In the short term, as we have learned in recent years, just because valuations are expensive doesn’t mean it has to change without a catalyst.
Max Berger, DWS: When things get especially volatile, as we saw through November 2024 in terms of swap spreads, we extend the framework we use for deciding whether credit is cheap or not and go back to the true investment alternatives. The spread over Bunds is still a very relevant number for us but we increasingly compare covered bonds against SSAs because they are typically more linked to swap spreads.
Then when we look at the very long term and ask ourselves whether credit is cheap or not. I agree with Marco’s assessment that it was rather expensive at the end of 2024. A simple comparison to Bunds is still a very good indication over a long-term horizon and we need to keep in mind that you open your 15 or 20-year credit charts and you look at spreads over Bunds and then you might say we’re close to the tights.
But the tights, especially for the five years before Covid, were during five years of negative rates and ECB buying via the Corporate Sector Purchase Programme. If we’re comparing to those five years, it’s very tough not to say that we are, to some degree, expensive now.
KEITH MULLIN, KM CAPITAL MARKETS: HENRYK, AS YOU STARTED PRE-FUNDING FOR 2025 IN 2024, DOES THAT MEAN YOU CAN SIT ON YOUR HANDS FOR A FEW MONTHS?
Henryk Wuppermann, E.ON: Our guidance is we do €3.5bn–€5bn a year and we select timing as appropriate. We don’t so much look at total yields; that can be handled with hedges. We’re more looking at how robust credit markets are at a given point in time.
Max Berger, DWS: We’re are still active. Liquidity even towards the end of 2024 was reasonable. We still have a lot of things to do around our assumptions about what the Trump administration might do. As Marco highlighted, the final weeks of 2024 were almost like we got new data points each week. Politics in Europe is still high on the agenda. Spreads are tight. We slightly derisked at the end of November but overall, the technicals felt pretty strong. And just as spreads tightened, it means things need to turn around quickly. In November and December, we asked ourselves, how do we want to start in January after quite a positive 2024?
KEITH MULLIN, KM CAPITAL MARKETS: WE TALKED ABOUT SWAP SPREAD VOLATILITY, WE’VE ALSO SEEN SOME VOLATILITY IN EURO SOVEREIGN SPREADS, ESPECIALLY IN FRANCE, GIVEN POLITICAL DEVELOPMENTS. WHAT ARE YOUR THOUGHTS ON THAT?
Max Berger, DWS: The starting point is that for the last 10 years, we’ve had a lot of good experiences with Italian spreads and how relative value has evolved. Some patterns have been really persistent in the sense that while banks are usually much more correlated to the sovereign, non-financials, even over an extended period of time, can trade through the sovereign. These are the patterns we’ve seen in Italy and I don’t see why they shouldn’t be linked to France, for example, in the same pattern. The French elections in summer already reviewed that pattern.
I believe that relative value overall in euro fixed income is a very strong theme and it has mean-reverting power. The French sovereign and banks can temporarily decouple and can remain volatile versus Greece etc, but longer term, at least on paper, I don’t think that can last because French investors are still the largest buyers of cash bonds.
If French sovereign bonds trade too cheaply, at some point everything else has to move against that because there are too many investors that would just buy French covered bonds or French sovereign bonds or maybe French banks. Longer term, that means either everything else has to move or France is cheap at some point. Speaking in early December, I would say the latter. The French complex is different to Italy.
Marco Stoeckle, Commerzbank: I agree with Max but there’s a third option, and every investor needs to answer for themselves how likely it is. The French credit profile has been completely rerated. Either at some point, it’s cheap and attractive and then it’s just about timing the market. Or you really have a fundamentally bearish view that it’s not yet cheap enough. Again, speaking in early December, it’s debatable whether that is a realistic view to have, given what else is going on in the eurozone.
Max Berger, DWS: We met with the sovereign methodology teams at the rating agencies to understand how they rate sovereigns and how they look at them. Our understanding is that they typically try to take a very long-term perspective on new governments. What’s the budget? How does it look three years later? What’s been implemented? A very long-term logic. But things can change or they might change their view of events if elections yield extreme results.
Henryk Wuppermann, E.ON: As a corporate guy to an investor, I’d be curious to know: if a corporate trades through its host government, is that attractive for you or would you need to have a higher yield than a government bond?
Max Berger, DWS: A lot of investors have been buying certain Italian non-financials through the Italian sovereign for months so it’s definitely possible. It depends on the nature of your funds. We have a lot of credit-only funds where the simple answer would be we almost don’t care too much where the sovereign trades from a relative value perspective.
But there are aggregate funds; there are multi-asset funds. There are still a lot of funds in the market that wouldn’t structurally buy that. The insurance angle, for example, thinking about solvency credit charts, even if France got downgraded two notches the solvency attractiveness versus credit would remain intact. It really depends on investors and fund objectives; there are lots of different things out there.
Marco Stoeckle, Commerzbank: It also depends on the type of firm you’re looking at. It’s a very different answer for banks than for multinational corporates. Some business models are more in between. If you have a utility company, for example, where the state is often involved directly or indirectly, the link is closer than for a tech company that has limited links. It always depends.
Max Berger, DWS: Maybe one additional perspective: people have been throwing around the euro break-up scenario for 10 years and it always comes back in cycles. At certain points, a popular narrative emerges to say “I’d rather own a German Double A industrial or a French Double A pharma company than a sovereign” when people increase their probability of euro break-up. That’s not in my view a very good argument but I think it’s one that got popular a couple of years ago and I wouldn’t be surprised if it came back.
KEITH MULLIN, KM CAPITAL MARKETS: LET’S MOVE TO OUR FINAL QUESTION. BASED ON WHAT YOU KNOW AT THE BEGINNING OF DECEMBER AND ASSUMING NOTHING DRAMATIC EMERGES, WHAT ARE YOUR EXPECTATIONS FOR 2025, OR MAYBE JUST FOR Q1?
Michael Mueller, Commerzbank: The first quarter is renowned for being a strong quarter for debt issuance. Many issuers take advantage of Q1 windows. I have no reason to believe that the first quarter or the first half should be dramatically different from recent periods. That means investor appetite for long duration if it’s the right name at the right price.
We saw a dramatic decrease in the subordination premium in 2024, which makes hybrid transactions relatively attractive, and I would expect hybrid supply to be solid. More generally, as long as the new issues arrive with new issue premiums, there will be a very good start to the year. That would be my assumption but it remains to be seen how headline risks determine market outcomes.
Max Berger, DWS: We think spreads are tight. You can never really pinpoint the trigger. There’s a lot of political and geopolitical noise but I think we’ll start 2025 more defensive than we have been over many periods in 2024. I wouldn’t say expectations about supply are unusual, so I would also look at a pretty good activity level in Q1.
The key thing to watch is supply, if banks rush to the market like they did in January 2024. But I don’t think there’s a particular reason for that, so I would say we’re looking at a pretty average January. Then it’s about managing Q1 to see if the defensive call works and how we react to Trump and how central banks path behave. Central bank paths is a very interesting theme and there’s definitely a credible scenario where central bank paths deviate a little. Maybe the Fed needs to put on its brakes earlier and maybe the ECB needs to be a bit more expansive. That will be very interesting to watch.
Marco Stoeckle, Commerzbank: I think it will be a bumpy ride with opportunities along the way. I have been running a relatively defensive stance since mid-summer. It’s difficult to time but I’m fairly convinced that there will be a Trump bump where we see some sort of spread widening but that could fix quite a few problems, at least if our base case materialises that the worst case outcomes in terms of tariff threats and the geopolitical ramifications of Trump 2.0 are avoided.
If that base case materialises, that would be an entry point to become more constructive on more cyclical sectors and export-oriented sectors, which we have been underweight now for quite a while, and also potentially high-yield. But really, timing is uncertain. You need to play it by ear, coming from a solid defensive base. And that’s what we’ve been recommending.
That could change. I’m erring towards all of this materialising earlier than later in the year, just from my experience with Trump 1.0. What’s different this time is that the president is prepared for a swifter approach to policies and that will accelerate the timeline compared to his first term.
Henryk Wuppermann, E.ON: I can only really repeat what the others have said. In terms of our company, we have done quite a bit of pre-financing. We issued at the upper end of our funding range in 2024. With that pre-financing not going to repeat in 2025, it gives us quite a bit of flexibility in terms of looking at markets when they are constructive. And we will.
KEITH MULLIN, KM CAPITAL MARKETS: THANK YOU FOR YOUR INSIGHTS.
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