IFR’s third German Corporate Funding Roundtable, which took place in Frankfurt in October, was a pretty bullish affair. Combining loan and DCM bankers as well as a borrower, panellists reviewed year-to-date activity in capital markets but the session focused on expectations for issuance in the year ahead.
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One of the bankers noted that being a banker in Germany is a good place to be, while our borrower – Henner Boettcher from Heidelberg Cement – expressed the same sentiment about being a corporate treasurer. If there were one takeaway from the discussion; that sums it up. Not that the panel was in any way complacent; there was definite recognition that there are headwinds out there and that the volatility we’ve seen is a concern. All agreed, though, that it’s very much a borrower’s market and that demand is outstripping supply and that’s not going to change in the short term.
But even though we’ve seen a pick-up in base yields, all-in funding costs are going to remain attractive as technical conditions favour the continuation of low or in some cases even tightening spreads. Issuance levels across loans, Schuldschein (where there’s been a definite shift to longer tenors) and bonds are likely to remain at or about current levels; with the consensus being on the side of a modest increase. Issuance drivers will remain the same: refinancing, some pre-financing, cleaning up balance sheets etc but definitely not event-driven activity.
The much vaunted pick-up in acquisition financing hasn’t happened and remains a possibility for next year. The art of the possible exhibited by the
Verizon trade was not lost on the panel. In short and as was discussed at last year’s event, acquisitions won’t fail due to lack of financing. As for the interplay between the various funding markets, the focus is very much on complementarity rather than competition between pools of capital and market segments, and borrowers are looking at funding diversification.
Banks are open for business and underwriting capacity is there (although the bullish conditions out there have led to an erosion of covenants which was mentioned by one participant as cause for potential concern). In the bond market, corporates across the spectrum – large caps as well as SMEs; rated and unrated, investment-grade and high-yield, regular and debut issuers – are finding a market with liquidity to put to work up and down the capital structure.
But borrowers are not being spooked by the prospect of higher rates down the line and forced to incur negative carry by coming too early. The expectation of funding levels remaining conducive into the medium term is sufficiently strong to keep any sense of stress or panic at bay. The excellent all-in funding costs on offer are going to be around for some time so borrowers will be able to capture them into the medium term. All of that said, some of the panel had expected borrowers to have taken better advantage of the favourable conditions but the notion of sheer borrower opportunism is definitely lacking.
As the economic cycle turns and we see an injection of growth, activity, particularly in the loan market, will see a natural pick-up as optimism, confidence and need come together.