League Tables

To view the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com Last Monday’s regional election in Schleswig-Holstein was seen as a key test of the country’s ruling coalition ahead of next year’s federal vote. Its humiliating defeat will fuel the uncertainty brewing over the French presidential poll and the untidy Greek elections. The resultant market volatility increasingly threatens Chancellor Angela Merkel’s delicate balancing act. The relentless austerity that she has had to push is partly the result of her own country’s economic success and highlights how far apart the eurozone is economically. The result is that Bund yields have tumbled to record low levels as Germany is seen as the only safe haven in a dysfunctional eurozone family. This has caused its own problems, with 10-year government paper edging towards the 1.50% mark and 30-year debt returning little over 2.25%. Investors can see the logic in such a scenario, but their desire to maximise their portfolio returns has seen a number of technically failed Bund auctions as they choose to eschew the ultra-low yields. Germany’s winning formula has been based on a solid manufacturing sector and an economy in which financial services play a relatively minor role. Banks which take pride in their domestic focus, loyally serving a traditional role in the provision of industrial capital, have cocooned the nation from the worst of the storm. But this is a formula based on the performance of a small number of key exports, and the cost and availability of capital remains key to their competitiveness, neither of which are immune to the unsettled climate. The shrinking public sector has depressed the covered bond market, causing the volume of Pfandbrief issuance to fall dramatically this year. At the same time, German investors face a squeeze on opportunity as a result of the ECB’s Long-Term Refinancing Operation. With France’s own political issues causing a narrowing of prospects there as well, they are simply going to have to wait for things to pick up. The country’s real economic strength cannot be taken for granted while the gremlins of European politics remain ready to gnaw at her vitals. Those used to the quantifiable arena of yields, spreads and losses may be too quick to dismiss the nebulous field of political risk, and many strategists warn that in the current climate European investors are failing to price it in properly. Germany’s hunger for stability has forced it to adopt the role of lender of last resort for a group of neighbours it regards as profligate. Yet this runs counter to its deep domestic instincts and remains an enduring source of unease. So far, Merkel has been able to manage this tension. But inflationary pressures, combined with the ECB’s inclination to cut interest rates to help southern Europe, continue to assault the nation’s hawkish reflexes towards rising prices. The conservative camp fears that the strategic vision of deficit reduction is under siege while the broader public sees no reason to moderate its disillusionment with the European project. Ultimately, it may be what happens next door – and in particular in France and Greece – that nudges this tension towards breaking point.

(To view the digital version of this report, please click here.) The day after the presidential election victory of Franςois Hollande in France, the front page of a leading German tabloid warned: “Good morning Chancellor. This is now the most important man in your political life.” It was all so different before Christmas. With Jean-Claude Trichet at the European Central Bank in Frankfurt and with Nicolas Sarkozy in the Elysee Palace in Paris, German Chancellor Angela Merkel was comfortably in the eurozone driving seat pushing the message of austerity. Even in March, Germany was the piper that called the tune. Back then a full 25 of the 27 eurozone countries inked Merkel’s fiscal pact at the EU summit. But now Merkel is looking a trifle isolated. Only three eurozone members – Portugal, Greece and Slovenia – have ratified Germany’s fiscal pact, there is no chance at all that France will sign up, and her message of austerity is sounding a little shrill. Fights over belt-tightening have seen several European governments tumble over the past few months, notably in Spain, Ireland and the Netherlands – the last, one of only four Triple A rated European states. At the same time as the French were rejecting Nicolas Sarkozy, a much more bad-tempered general election was taking place in Greece. The two main coalition parties – those who have been championing both the euro rescue and austerity fell short of a majority. This makes a Greek exit from the euro look increasingly likely. In fact, this looks like the end of austerity politics. In his election victory speech, Hollande said that he hoped that his election meant that: “Austerity does not have to be inevitable.” While Mario Draghi, Trichet’s successor at the ECB, kept eurozone interest rates at an all time low of 1% in the May rates decision meeting, said: “We have to put growth back at the centre of the agenda.” Merkel has started to shift her stance slightly away from plain vanilla austerity, but does not sound convincing while doing so. At the end of April – notably after Hollande’s success in the first round of the French presidential elections – she admitted through visibly clenched teeth that fiscal policy alone could not solve the eurozone debt crisis. “We need growth in the form of sustainable initiatives, not stimulus programmes which would increase debt, but growth in the form of structural reforms,” she said in a speech in Berlin. Her discomfort in delivering such a message reveals the extent to which the eurozone crisis has put Merkel in an impossibly difficult position. The relentless austerity that she has had to push is partly the result of her own country’s economic success and highlights how far apart the eurozone is economically.Cheerful reading Growth in Germany does appear unstoppable. The spring economic report from the German research institutes makes for cheerful reading… if you are German. GDP is expected to grow 0.9% this year and 2% next year. And German unemployment continues to drop. At the moment it is at 6.7%, or 2.8m, the lowest rate since the fall of the Berlin Wall in 1990. Indeed, the unemployment peak during the 2008–09 recession was an enviable 7.9%. And to put those figures into even starker perspective, German youth unemployment sits at 8.2% compared with Spain’s 50.5%. The economy’s performance is primarily down to its success as an exporter, most significantly with Asia. German exports to China hit €65bn last year. A sign of how important Asia has become is that that figure has more than doubled during the past five years. This is all good news, but beneath the surface tensions remain. Salaries are rising in Germany. For example, the country’s Beamte – civil servants – have managed to get hold of a pay rise of 6.3% for the next two years, while IG Metall, Germany’s engineering union, is demanding a 6.5% pay hike for this year alone. Also on the rise is Germany’s historical bugbear: inflation. Although a manageable rate of 2% at the moment, the

(To view the digital version of this report, please click here.) London has traditionally enjoyed a level of political support that Frankfurt, situated remotely from the politicians in Berlin, can only envy, said Gertrud Traud, chief economist at Helaba, a Frankfurt-based bank. Now London finds itself in an increasingly similar situation to Germany. “Politicians are now in the driving seat,” said Thomas Schluter, spokesperson of the Association of German Banks. The haircut that banks voluntarily took on their Greek exposures perfectly demonstrates the new climate in global banking, with banks forced to acquiesce to politicians. Geographical proximity is not the only explanation. The UK economy is dependent on financial services as its pre-eminent sector, responsible for more than 11% of UK tax income, according to PwC. But if the UK is globally synonymous with investment banking, Germany’s association with manufacturing is even stronger, and it is that industry the German government is most concerned with protecting. Its financial services industry, by contrast, provides only about 4% of the German tax take. German banks are mainly there to serve the real economy, which is in turn driven by its manufacturing sector and particularly the Mittelstand. Fulfilling this function makes the sector extremely decentralised. Even within Germany, Frankfurt does not have the stranglehold that London has in the UK. “Much of Germany’s financial infrastructure is actually outside Frankfurt,” said Prof Jan Pieter Krahnen, head of Center for Financial Studies at Goethe-University Frankfurt. “The savings banks are the biggest segment by far, and they are present everywhere in the country. Although they look like a collection of small banks, they are highly co-ordinated with lots of common services. They are, in effect, one entity and together they are bigger than Deutsche Bank.” Similarly, the 1,500 co-operative banks are found across Germany, and constitute the second-largest banking body, only slightly smaller than the private banking sector. Deutsche Bank comes in third.Changing focus The focus on domestic business banking also means Frankfurt is dominated by traditional loans business, with capital markets constituting a much smaller segment of banks’ activities. But this is starting to change, said Oliver Wagner, managing director of the Association of Foreign Banks in Germany. “We are seeing changes in behaviour, away from lending and increasingly into capital markets,” he said, with more and more Mittelstand companies issuing own bonds instead of using loans. Banks now advise their business clients at structuring corporate bonds and help them to place them in the market nationally and internationally. This might be a small advantage for foreign banks, which have expertise in this area, Wagner said, but is unlikely to change market competition between Frankfurt and other German financial centres noticeably. Mittelstand and other German businesses would continue to prefer to bank locally due to the federal structure of the German economy, he said. Even when companies list on the Deutsche Borse, many opt to simultaneously list on local exchanges, where they have better access to local retail investors. The economic fallout of the crisis has arguably increased the relative strength of Frankfurt within Germany: regional banks have suffered more than those in the financial capital, because they tend to be less diversified. But there are vibrant financial centres outside Frankfurt, in Munich, Dusseldorf and Hamburg, each with its own strong national ties. Munich has a concentration of Italian and Swiss banks, serving businesses that trade between the two via the shared border. Hamburg has strong Scandinavian ties, as well as some Iranian banks and Dusseldorf is home to a number of Japanese banks, which serve Japanese manufacturers that originally settled there. “To some extent Frankfurt is competing with the likes of London and New York, in te

(To view the digital version of this report, please click here.) The eurozone crisis might keep its sovereigns under pressure, but the region’s corporates, and German auto manufacturers in particular, managed to get out of the gates this year to a terrific start with successful and tight issuance. With pension funds and insurance companies increasingly wary about throwing their cash at the indebted European governments, and the coupon of benchmark eurozone countries at all-time lows, corporate debt yields have appeared a generous option. “Investors have shifted their attention from sovereigns, to supras and now to corporates,” said Roman Schmidt, global head of corporate finance at Commerzbank in Frankfurt. Demand has been helped by a comparative scarcity of new paper. European corporates need to redeem €126bn maturing debt in 2012 – a relatively modest 66% of their new issuance last year, according to figures from Fitch. By February, investors had already put €12.5bn into European bond funds, the biggest inflow since August 2010, according to Morningstar, a fund analysis firm. “Corporate treasurers couldn’t get issues out quickly enough. I am reminded of the buying frenzy of internet stock in 2001,” Schmidt said. How successful this issuance frenzy was in the first quarter can been seen in that the yield premium on corporate bonds to benchmark German government debt has narrowed 56bp this year to 145bp, according to Bank of America Merrill Lynch. Traditionally early issuers, German car manufacturers have remained in pole position in 2012 with a story that investors have bought into thanks to a remarkably successful 2011. “Investors have shifted their attention from sovereigns, to supras and now to corporates” Munich-based BMW was first off the grid on January 4 with the largest European investment-grade corporate bond seen since German chemical and pharmaceutical giant Merck KGaA came to the market in March 2010. It was a hefty €2.5bn dual-tranche three-year and seven-year deal on the back of a €6.725bn book that priced at a tight 83bp and 125bp over mid-swaps respectively. Stuttgart-based rivals Daimler-Benz has been as successful in the market. At the end of March it sold a €750m seven-year deal at mid-swaps plus 65bp. Less than three weeks previously it had attracted demand of around €2.5bn for an €750m five-year. That one priced at 2%, an all-time low coupon for a five-year corporate, on the back of an upgrade by S&P to A–.Can’t get enough Investors can’t seem to get enough of German auto paper. What is noticeable is not only the size of the books, but how small the new issue premia the car manufacturers are having to pay to borrow money. In Daimler’s case, the €750m deal priced at a premium of –2bp and in February – before the upgrade – it sold a €1bn three-year at mid-swaps plus 65bp, paying a premium of only around 5bp. Even asset-based securitisation is being looked at once more as a serious funding option. “People are looking at ABS again, but they need ABS securities to be as transparent as possible,” said Schmidt. At the beginning of March, for example, Wolfsburg-based Volkswagen printed an increased €1bn ABS from its VCL programme – VCL 15 – at the tightest level since November 2007. The structure of the deal is precisely what Schmidt is talking about. It is short – the senior tranche had a WAL of 1.28 years – and it has clear and familiar collateral. Perhaps the most significant sign for the doubters is that even mezzanine tranches are being sold. The Single A 1.88-year Tranche on this deal was 2.6 times oversubscribed. Having played the climate of low long-term volatility and a rally in credit spreads so well in the first quarter, the result of this is that issuance pressure has been taken off the German car industry for the rest of the year. Daimler, for example, has €25bn outstanding debt and €3bn of that is due this year, much of which has been raised already. As Felix Orsini, Societe Generale’s global co

(To view the digital version of this report, please click here.) For a brief moment the poster boy of bonds and the great hope for European bank funding, covered bonds have since slipped out of the limelight as the European debt crisis continues to tighten its grip. “There has been an 80% drop in terms of volumes,” said Armin Peter, head of covered bonds at UBS in London. The figures make for stark reading. Issuance into the European covered bond market is low. Year-to-date issuance within the eurozone is a paltry €59.3bn according to UBS. The only year in recent memory with lower issuance was 2009 with €40.7bn. As with manufacturing, Germany used to be the engine of covered bond issuance, but the volume of public sector Pfandbrief issuance in Germany this year makes for sober reading. Only €2bn has been sold so far this year. That represents 4% of the total supply, according to RBS. To put that figure into perspective, public sector Pfandbriefe represented 80% of supply in 2000. “The Pfandbrief market has shrunk predominantly because the public sector has shrunk,” says Mauricio Noe, head of covered bond origination at Deutsche Bank. So if public sector issuance has dropped off a cliff, are German investors simply looking at mortgage-backed covered bonds? Not really. Although there is clear demand from domestic investors, the issuance has not kept pace. What issuance there has been were sporadic and plain vanilla. In early March ING DiBa, the direct and retail banking arm of ING Groep in Austria and Germany, sold a €500m seven-year mortgage-backed Pfandbrief that priced at mid-swaps plus 17bp; in late March mortgage lender WL Bank priced a €500m no-grow 10-year at mid-swaps plus 26bp; at the very end of the month German bank HSH Nordbank sold a no-grow €500m five-year mortgage Pfandbrief; and in late April regional bank Helaba sold an €1bn seven-year at mid-swaps plus 15bp. Aside from the tight pricing, the size of the books in each of the cases stands out. Although they were only €500m deals, HSH Nordbank attracted orders of €1.2bn, WL Bank attracted €1.8bn of orders and ING DiBa attracted a whopping €2.6bn book – and that despite the tightening of guidance in all three cases.Challenges Limited issuance and oversubscriptions can prove challenging for investors. “You are hunting for a premium in new issue, but when there is so little issuance, you can’t always see it,” says Torsten Strohrmann, portfolio manager, euro fixed income, at DWS Investment in Frankfurt. He has been looking at spreads at the short end in the secondary market. Two issues have hampered domestic covered bond issuance. First and foremost tighter regulation and harsher treatment at the hands of the ratings agencies especially for public sector covered bonds is encouraging lenders to shrink and simplify their balance sheets. In its covered bond outlook for 2012, Fitch warned issuers to manage overcollateralisation levels to support ratings. “If an issuer fails to manage its programme’s overcollateralisation level, a more severe covered bond downgrade will occur,” it wrote. This has had an effect and banks are considerably more cautious than they used to be. Towards the end of April, mortgage bank Berlin-Hannoversche Hypothekenbank announced a buyback of four public sector Pfandbrief issues, to give an overcollateralisation boost to its mortgage Pfandbriefe. And it is noticeable that Deutsche Bank – the country’s largest bank and the canary down the mine for covered bonds – has only sold one issue this year – a €500m seven-year mortgage Pfandbrief at mid-swaps plus. Although €1bn had been expected, to avoid even the faintest whiff of too much granularity on the liability side, Germany’s largest bank capped issuance at €500m. But the elephant in the room is €1trn liquidity the European Central Bank has injected into the market. “The existence of LTRO means that issuers are suffering less funding pressure,” says Florian Hillenbrand, a covered bond strategist at

(To view the digital version of this report, please click here.) The Triple A rated agency, backed by a government guarantee from the sovereign powerhouse, has stood head and shoulders above all of its eurozone sector rivals this year. It also remains confident that it will meet the remainder €40bn of its 2012 €80bn funding target – the largest for any of the continent’s agencies – with relative ease. KfW has remained steadfast, as the likes of the European Investment Bank has scaled back its dollar deals, and embarked on a massive front-loading splurge to take advantage of a first-quarter rally in spreads and spike in liquidity. The EIB has already completed about 65% of its smaller €60bn funding goal, while KfW is roughly at the halfway mark. A sudden widening in spreads in early April might have left less influential issuers filled with regret that they did not take advantage of hot market conditions when they could. But not KfW. The decision not to front-load was intentional, it says. “There is no regret about that. We are exactly in the position where we want to be,” said Frank Czichowski, treasurer at KfW. “There is still a lot of liquidity in the market. Clearly there is a very active political debate about the future of the euro, but it is going to continue and we have to navigate volatile spots. We don’t think the picture will change dramatically for the rest of the year.” KfW’s reputation for regular issuance across various currencies and tenors seems to have served it well. It has left a trail blaze for other issuers, who have benefited from KfW’s nerve. Not only was it the first European issuer to tackle the dollar market this year, but it pulled off a niche 10-year dollar deal, exempt to all but the best issuers, and was the first agency to go for a 10-year in euros. The contribution of its benchmark programmes in US dollars for its overall funding has never been larger. In contrast, the EIB has relied more heavily on the euro market this year, which has accounted for 58% – or €22bn of the €38bn-equivalent it has raised so far. That compares with 46% euro funding in 2011. “There is still a lot of liquidity in the market. Clearly there is a very active political debate about the future of the euro, but it is going to continue and we have to navigate volatile spots. We don’t think the picture will change dramatically for the rest of the year” In euros KfW has raised €13bn from three benchmark deals with five, seven and 10-year maturities, and US$16.5bn in the dollar market from four deals, two of which have had three-year maturities and the other two five and 10-year. “There has been very strong structural demand for KfW, which is partly a reflection of a flight to quality. The benchmark funding has been very much driven by investors’ preference for liquid product,” said Czichowski. It has also set records along the way: In April it sold US$4bn in its latest foray into the dollar market, and its second three-year tenor in that sector, at mid-swaps plus 5bp. The issuer attracted orders of US$4.9bn despite setting a record low coupon of 0.625%. “While you might think that people would balk at the coupon, it’s really all about parking cash,” said a lead manager on the trade at the time. “And a short-dated KfW is just the sort of safe investment that they’re after at the moment.” Records have not been confined to its benchmark programme either.In March, KfW priced a two-year €2bn bond at the tightest level ever seen for a borrower across all sectors – printing at mid-swaps minus 60bp – stealing the crown from Sweden. Few doubt that KfW’s prudent approach will let it down as a rocky second half looks set to be in store. “A short-dated KfW is just the sort of safe investment that they’re after at the moment” The key, said Czichowski, is not to overstretch the market. “We can assume that a larger differentiation between issuers is going to be the new norm for some time to come. It is something that issuers have to learn t

(To view the digital version of this report, please click here.) “We fear that the cuts are too deep and are being made too fast.” Nowadays, that is a familiar cri de coeur in Europe. In this instance, however, it comes not from opposition politicians protesting against austerity, but from David Wedepohl, spokesperson for the German Solar Industry Association (BSW-Solar). BSW-Solar represents an industry that is appalled by the German government’s recent decision to cut its support for the country’s solar industry by up to 32%. According to BSW, the consequences of the cuts will be that “the operation of solar power systems will for the most part become unprofitable, a wave of bankruptcies will become inevitable, and 100,000 jobs will be threatened”. Public opinion, BSW-Solar says, is squarely behind the industry. As proof, it points to the 11,000 people who turned out at the Brandenburg Gate on a cold day in early March to protest against what the rally’s organisers called “the solar phase-out”. That may be an exaggeration, and as demonstrations go, a turnout of 11,000 hardly amounts to what BSW-Solar described as a “mass rally”.Brutal falls But job losses in the solar industry in Germany are clearly gathering momentum, with Q-Cells perhaps the most notable of the recent bankruptcies in the country’s photovoltaics (PV) sector. Floated in 2005 in an IPO that was 35 times covered, evoking memories of the fateful Neuer Markt boom, Q-Cells saw its share price peak at just over €81.05 in December 2007. The value of the shares are now worth little more than small change, and Q-Cells is by no means the only German solar company whose shareholders (many of them retail) have endured an Icarus-style descent in the value of their holdings. There have been equally calamitous falls for other one-time stock market favourites such as Solon and Solar Millennium, both of which have sought protection from their creditors in recent months. Even for the industry survivors, share price falls have been brutal. SMA Solar Technology, which says it had its second best year in 2011, despite of a fall in operating profit from €516m to €240m, has seen its share price plunge from close to €100 at the end of 2010 to a little over €30 in recent trading. Companies such as Q-Cells, however, were in deep trouble long before the subsidy cuts, with surplus capacity in the industry driving module prices lower throughout 2011. According to pvXchange, a business-to-business exchange that monitors module price trends, “by the end of 2011, a price level was reached that nobody in the industry thought was even remotely possible at the beginning of last year. Driven by the price reductions of Chinese producers, the other manufacturers had to follow suit, pushing down the price index in all categories by 32.5% to 45%”. This is one reason why institutional investors have been suspicious of the sector for a while. “I think photovoltaics will continue to play an important role in Germany’s energy mix,” said Joerg Sperling, a partner at the Munich office of WHEB Partners, a cleantech private equity fund which is an investor in pvXchange. “But I always had my doubts about the sustainability of cell manufacturing in Germany. I see the industry developing in the same way as the semiconductor sector, where the cost of capital is a key driver of competitiveness. Asian manufacturers have a clear advantage in that respect, which is why we have steered clear of German PV cell manufacturing companies.”’Complex puzzle’ At issue for investors in public as well as private equity is not the capacity of the sun to shine lustily enough to turn the world’s lights on. Even allowing for wet weekends in Oberstdorf (apparently the wettest city in Germany), the sun generates 1,080,000,000 terawatt hours of power, or 60,000 times the world’s total energy requirements, according to the website of the bankrupt Solar Millennium. The issue is how competitively this dazzling amount of power can be h

(To view the digital version of this report, please click here.) Bold plans to shut 17 nuclear plants by 2022 has focused attention on Berlin’s commitment to renewable energy, but the success of this radical green agenda will depend on investment in new conventional power stations. The ambitious experiment will force the country to find a low-carbon energy source to replace nuclear – which meets about a quarter of Germany’s electricity demand – likely to be natural gas. A global abundance of gas is fuelling an exploration bonanza, yet the cost of nuclear decommissioning, tough market conditions and high debts mean Germany’s energy giants will fight shy of investing in gas-fired power plants. Existing strains on a fragile electricity network has prompted some commentators to question both the decision to switch off nuclear and the 2022 deadline. In an apparent effort to demonstrate that sufficient capacity is planned to replace it, on April 23, Germany’s main energy lobby group BDEW put a positive gloss on plans by utilities to invest up to €60bn in 84 new plants – conventional and renewable – by the end of the decade. But BDEW managing director Hildegard Mueller admitted the list presented “an optimistic view of investment developments” and that many projects may not materialise. The closure after last year’s Fukushima crisis in Japan of eight nuclear reactors has placed Germany’s grid under pressure, underlining calls to build new gas plants, which have competitive advantages over coal.No rush to build But the big corporations that dominate the market – local players RWE, E.ON and EnBW along with Scandinavian Vattenfall – are in no rush to build them. Bad results last year underlined how the days of debt-fuelled expansion are over and restructuring is under way. As renewables gather pace, the utilities fear gas plants will be seen merely as a standby to fill gaps left by clean energy. Renewables now have supply priority over fossil fuels, undermining the competitiveness of gas and making the high cost of constructing and operating new plants unattractive. Dr Matthias Lang of Bird & Bird, a lawyer who specialises in the energy market, said new regulatory rules might now be required. “The statutory priority for renewable power under the Renewable Energy Sources Act means that as long as renewable power is available, you cannot sell your conventional power. The higher the percentage of renewables, the lower the remaining quantity for conventional. Anybody – not just established utilities – will only invest if they think the regulatory environment makes it likely that there will be a sufficient return on the investment.” Essen-based RWE has already said it would not build new gas and coal plants after 2014, Düsseldorf’s E.ON is intent on expanding outside Europe, and other operators are delaying decisions until the investment climate improves. In January the municipal utility Rhein Energie postponed a decision to build a new gas-fired power plant near Cologne, and in February Statkraft said it would shut its gas plant in Emden. “The statutory priority for renewable power under the Renewable Energy Sources Act means that as long as renewable power is available, you cannot sell your conventional power. The higher the percentage of renewables, the lower the remaining quantity for conventional” And after lobbying against renewables subsidies for years, the big utilities want a piece of the action: RWE has committed itself to investing more than €1bn a year in renewables, and E.ON plans to invest €7bn in clean energy during the next five years. EnBW and and 19 municipal utilities are building Germany’s first offshore wind farm with EIB financing.Nuclear repercussions The nuclear announcement had dramatic repercussions, with industry reports putting the cost of the decision to RWE of more than €1bn in lost earnings and to E.ON of €2.5bn in Ebitda, exacerbating losses from the economic downturn and high gas prices and straining rela

(To view the digital version of this report, please click here.) Those who lead the European ECM business are often knocked off course by both political and economic ill winds.Yet German skippers have enjoyed a relatively calmer sea amid the storm. The economy is benefiting from a depressed currency, the political climate is uniquely stable for the region, sentiment is positive and in 2012 valuations are on the up. For now the characteristically conservative and dependent nature of businesses and management is a massive benefit. By the end of April, the main German index, the DAX, was up 15% for the year, having been up over 21% in mid-March. By contrast, the FTSE 100 and CAC 40 had delivered gains of just 3% and 1.7% respectively, while the Eurostoxx 50 had lost just under 0.5%. The Spanish IBEX 35 was off nearly 20%. Yet despite these gains, analysts were still recommending Germany as the best place for equity investors to put their money. JP Morgan Cazenove research said the core of the eurozone remained the preference for investment. “DAX [is the] top pick despite 15% year-to-date outperformance. Demand for credit is much more resilient in [the] core than in [the] periphery. We think [the] German domestic picture is worth highlighting: credit growth is outright positive, house prices are moving higher and wage growth is accelerating at double the inflation rate. ECB monetary policy is clearly too loose for Germany, and it is likely to remain so. These developments support German domestic plays,” the report said. Bankers agree that the German economy is withstanding, and in some ways benefiting from, the troubles abroad. “Despite the continuing uncertainties around sovereign debt in other parts of the eurozone, we still have relatively good news coming out from domestic companies,” said Ralf Darpe, co-head of German corporate finance at SG. “Germans are producing solid results. As an export-led economy companies are also less dependent on the home market.” Those that have led deals in Germany in 2012 have found investors of the same mind. “We have led several German issues this year and on each occasion the stock has, in a way, been ripped out of our hands,” said a senior German originator. “Germany is the strongest economy in Europe and we benefit from it thanks to good companies with history and management teams seen as appropriately cautious.” The numbers back up the sentiment, even if every deal has not been such an easy sell. In the year to April 24 2012, total German equity and equity related volume totalled nearly US$27bn – impressive considering volumes collapsed Europe-wide in the second half of 2011. The volume principally came from a selection of jumbo issues including accelerated fundraisings for ThyssenKrupp of US$2.3bn and RWE at US$2.8bn, a sponsor exit in Kabel Deutschland (US$1.2bn), and of course Commerzbank’s blockbuster US$13.9bn recapitalisation.Perfectly formed Yet the flow of IPOs have been at the other end of the scale with largely unknown names such as RIB Software, Derby Cycle, Norma and GSW Immobilien coming to the market, with the latter by far the largest at €407m. “The German companies coming to market have been market leaders, the transactions were of a decent size and the stock is liquid,” said Darpe. “Right now investors want that – a solid track record, mature profile, rising market share and experienced management. You see it with GSW, which has now returned [with a €201.8m rights issue] as quite the success story.” Yet the IPOs everyone had been waiting for in 2011 did not arrive from speciality chemicals group Evonik and Siemens’ lighting unit Osram – though they are now tantalisingly close in 2012 and have been joined in the pipeline by Rheinmetall’s automotive subsidiary Kolbenschmidt Pierburg and insurer Talanx. In fact, Kolbenschmidt Pierburg is already in the market, having launched a €500m IPO on Monday, May 7, with pricing due at the beginning of June. Rheinmetall wants to sell a

(To view the digital version of this report, please click here.) While syndicated lending in EMEA slumped 50% versus last year as European banks focus on shrinking balance sheets to meet tough new capital rules, loan activity in Germany remained stable with unchanged total volumes of US$29bn this year, according to Thomson Reuters data. The stability in the country’s loan market was driven by a number of jumbo refinancings, including a €6bn deal for automotive group Schaeffler, a €4bn refinancing for industrial conglomerate Siemens and a €3bn maturity extension for HeidelbergCement. “German corporates are in good shape and are expanding and as a result there will be an increased need for loans for refinancing or event-driven purposes,” said Torsten Aul, head of syndicate at IKB. German banks have also slightly increased their pro-rata share in the loan market, from 11% in 2011 to 12% so far this year, while French, Italian and Spanish banks all had to give up market share in EMEA due rising funding costs and a cut-back in lending to non-core clients and regions, which resulted in a loan-asset sell-off in particular by French and Spanish banks. Although German banks have been relatively inactive in selling large loan positions, some German banks have started reducing their commitments, in particular on leveraged buyout loans. “German banks usually committed large tickets on syndicated facilities, but there is a tendency to reduce the ticket sizes on deals in the primary market and further partial sell-down of positions in the secondary market if the prices are right in order to release balance sheet,” Aul said.Home markets Like French and peripheral banks, German banks are cutting lending outside the country with Bundesbank data showing that German banks cut financing for foreign banks and companies by around €480bn from 2007 to 2011 compared with an increase of €195bn of financing to domestic companies, according to a Fitch report. But unlike the peripheral banks, the move puts German banks in a pole position due to the country’s economic strength compared to uncertainties in France, Spain and Italy, bankers argue. “German banks will benefit from the strength of the German economy as corporates will fall back on their local house-banks. German banks are also well placed in the current market due to lower funding costs compared to many other European banks,” Aul said. Nevertheless, most European banks have seen an increase in funding costs, including dollar funding, which has inevitably resulted in some premiums on German loan deals as well. “We are seeing a few new trends coming to Germany as a result of the wider market developments, such as the premiums on US dollar drawings, reflected on deals such as HeidelbergCement and Henkel. The feature is nothing specific for the German bank market but a result of developments in the European market as a whole,” said Volkhardt Kruse, head of syndication and sales at Commerzbank. German consumer goods maker Henkel’s €800m revolving credit facility paid a first-draw utilisation fee and a premium of 50bp on dollar drawings, helping to soothe the concerns of some European banks.Schuldscheine return Schuldscheine are making a comeback in Germany. The privately placed paper, which is typically less expensive than a bond with maturities of up to 10 years, is also available to non-German companies such as UK supermarket J Sainsbury, which raised a €100m Schuldschein in February. “Borrowers find them attractive in uncertain environments and they provide an alternative to the loan and bond market, especially for smaller to mid-sized deals of up to €500m. It’s a product that can also come in combination with a syndicated loan as we have seen in deals like GKM. It’s an area that we expect to grow further,” said Dominik Mueller, Commerzbank’s deputy head loan capital markets Europe. In 2011, Schuldschein volumes doubled to almost €8bn from €4bn in 2010 and so far in 2012 there were already €3.5bn