DAX-bound

To see 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. ALL GERMAN BONDS 30/4/2013–30/4/2014 ALL GERMAN BONDS 30/4/2013–30/4/2014 Bookrunner No of issues Total US$(m) Share (%) 1 Deutsche Bank 141 36,282.30 10.1 2 UniCredit 124 31,860.40 8.8 3 HSBC 103 24,163.50 6.7 4 LBBW 104 24,117.30 6.7 5 Barclays 70 22,891.40 6.4 6 Commerzbank 77 15,562.00 4.3 7 JP Morgan 74 14,753.70 4.1 8 Morgan Stanley 46 13,575.00 3.8 9 BNP Paribas 58 13,514.00 3.8 10 Goldman Sachs 45 13,217.20 3.7 11 Societe Generale 37 13,174.20 3.7 12 Bayerische Landesbank 69 10,310.50 2.9 13 RBS 33 10,123.30 2.8 14 RBC 54 9,550.60 2.7 15 Credit Suisse 31 8,665.60 2.4 16 DZ Bank 63 8,498.90 2.4 17 Credit Agricole 31 8,357.80 2.3 18 Nord/LB 59 7,809.20 2.2 19 Citigroup 35 7,401.90 2.1 20 BofA Merrill 22 6,966.20 1.9 21 Nomura 32 6,856.60 1.9 22 WGZ Bank 40 5,916.90 1.6 23 DekaBank 34 5,045.20 1.4 24 HSH Nordbank 25 4,581.40 1.3 25 Hessen Thueringen 27 4,454.40 1.2 Market total 722 360,514.3 Source: Thomson Reuters GERMAN LOANS 30/4/2013–30/4/2014 GERMAN LOANS 30/4/2013–30/4/2014 Bookrunner No of issues Total US$(m) Share (%) 1 Commerzbank 126 16,210.60 10.1 2 UniCredit 92 14,691.00 9.1 3 Deutsche Bank 74 10,442.20 6.5 4 BNP Paribas 41 8,068.30 5 5 LBBW 61 6,983.70 4.3 6 HSBC 43 5,965.30 3.7 7 JP Morgan 27 5,576.50 3.5 8 BofA Merrill 22 4,570.60 2.8 9 Hessen Thueringen 31 4,534.60 2.8 10 Societe Generale 24 4,508.20 2.8 11 RBS 27 4,493.30 2.8 12 Citigroup 22 4,465.10 2.8 13 Bayerische Landesbank 34 4,091.50 2.5 14 ING 28 4,024.20 2.5 15 Barclays 21 3,717.50 2.3 16 Credit Agricole 23 3,565.60 2.2 17 DZ Bank 36 3,436.80 2.1 18 SEB 24 3,170.90 2 19 Mitsubishi UFJ 16 3,065.70 1.9 20 Goldman Sachs 17 2,976.00 1.9 21 Morgan Stanley 14 2,854.10 1.8 22 Mizuho Financial Group 13 2,609.70 1.6 23 Sumitomo Mitsui 12 2,550.80 1.6 24 RBC 10 1,843.70 1.2 25 Credit Suisse 12 1,787.70 1.1 Market total 198 160,982.8 Source: Thomson Reuters GERMAN SECURITISATIONS 30/4/2013–30/4/2014 GERMAN SECURITISATIONS 30/4/2013–30/4/2014 Bookrunner No of issues Total US$(m) Share (%) 1 Volkswagen Bank 3 2,829.20 17.6 2 Societe Generale 3 2,379.80 14.8 3 RBS 2 2,234.40 13.9 4 LBBW 4 1,409.50 8.8 5 Commerzbank 2 1,005.60 6.3 6 Raiffeisen 2 905.2 5.6 7 Barclays 2 803.5 5 8 Citigroup 2 728.4 4.5 9 BofA Merrill 2 697.8 4.3 10 RBC 1 594.8 3.7 11 UniCredit 1 530.5 3.3 12 HSBC 1 487.2 3 13 Deutsche Bank 1 445.7 2.8 14 BNP Paribas 1 315.6 2 15 Credit Agricole 1 241.1 1.5 Market total 17 16,068.90 Source: Thomson Reuters GERMAN CONVERTIBLES 30/4/2013–30/4/2014 GERMAN CONVERTIBLES 30/4/2013–30/4/2014 Bookrunner No of issues Total US$(m) Share (%) 1 Societe Generale 2 369.7 18.3 2 BofA Merrill 4 365.7 18.1 3 Credit Suisse 2 345 17.1 4 UniCredit 2 277 13.7 5 Deutsche Bank 2 250.3 12.4 6 UBS 1 112.8 5.6 7 Berenberg Bank 2 75.8 3.8 8 JP Morgan 1 52.5 2.6 9 Goldman Sachs 1 44.8 2.2 10 MainFirst Holding 1 39 1.9 Market total 11 2,016.50 Source: Thomson Reuters GERMAN EUROMARKET BONDS 30/4/2013–30/4/2014 GERMAN EUROMARKET BONDS 30/4/2013–30/4/2014 Bookrunner No of issues Total US$(m) Share (%) 1 UniCredit 123 30,943.20 10.6 2 Deutsche Bank 120 24,791.40 8.5 3 LBBW 103 21,813.90 7.5 4 HSBC 94 17,433.80 6 5 Barclays 64 16,464.00 5.6 6 Commerzbank 74 15,306.50 5.2 7 Societe Generale 36 11,394.00 3.9 8 BNP Paribas 54 10,971.20 3.8 9 JP Morgan 68 10,790.80 3.7 10 Bayerische Landesbank 69 10,310.50 3.5 11 Morgan Stanley 42 10,038.10 3.4 12 Goldman Sachs 39 9,915.80 3.4 13 DZ Bank 63 8,498.90 2.9 14 Nord/LB 59 7,809.20 2.7 15 RBS 28 7,108.30 2.4 16 Citigroup 32 7,008.80 2.4 17 BofA Merrill 22 6,966.20 2.4 18 RBC 41 6,235.20 2.1 19 WGZ Bank 40 5,916.90 2 20 Credit Agricole 29 5,187.60 1.8 21 DekaBank 34 5,045.20 1.7 22 HSH Nordbank 25 4,581.40 1.6 23 Credit Suisse 27 4,471.30 1.5 24 Hessen Thueringen 27 4,454.40 1.5 25 Volkswagen 3 2,829.20 1 Market total 658 292,249.5

To see 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. Fiddler and conductor As a solo performer, Germany has few rivals and many fans, striking all the right notes and rising sublimely above Europe’s discord as the DAX posts all-time highs, data show a growing economy, and unemployment dips to the lowest rate since unification. But the continent’s star performer has been struggling with some bad strings. An ageing population, decaying infrastructure and reliance on imported energy weaken the melody, and the shipping industry may be one of the biggest threats to German banks due to rising NPLs. On top of that, Germany has had to expend its creative energy striving for greater harmony: stuck between a country it does not want to offend, Russia, and a country it used to admire, the US, while trying to conduct the distracted and uncertain European orchestra. EU commitments will have to be weighed against bear-baiting, although diplomacy these days is a key lyric in the German political hymn sheet. Its negotiating skills have been much in evidence for a few years, notably in the aftermath of the eurozone crisis, where it rescued the euro project back from a disastrous premier. Much of its domestic success has been predicated on the Mittelstand. Frustratingly, however, from investors’ point of view, it is difficult to gain exposure to this rich vein of success, such is the paucity of their funding needs. What little they need to raise is adequately catered for by the loan and Schuldschein markets. Bond investors have been presented with more choice, but even here the returns on offer are often less than they would wish for. Evidence of joined-up thinking has been evident in the bond markets. Six cities in the state of North Rine-Westphalia – each a minnow in DCM borrowing terms – clubbed together to access funding in a demonstration of the country’s trademark co-operative approach. But traditional bond fare is increasingly difficult to find. The country’s flagship asset class – the Pfandbrief  – has been in decline for a number of years. The question is where the sector goes from here. SME loan-backed structured covered bonds from Commerzbank and aircraft Pfandbriefe from Nord/LB elicited mixed reviews. If nothing else, however, they proved that this asset class is not beyond development. But those hell-bent on gaining exposure to the German banking system will have other means at their disposal. As this report went to press, Deutsche Bank was at last boosting its capital base through both straight equity and Additional Tier 1 capital raising, the latter offering an array of currencies and structures. For many, the corporate sector has been the source of alternative investment opportunities, with automakers leading the line when it comes to bond issuance. While Daimler and BMW have been active, it is Volkswagen that has caught the eye, seemingly barely a week passing by without it issuing in one market or another. There is a danger that such a heavy schedule could impact on spreads, but it does speak of an industry that is on the mend, both at home and abroad. Consequently, not only major currencies have been on their menu but also non-core markets, most notably renminbi as a result of the growing importance of China to their businesses. This gave rise to issuance in both the onshore (Panda) and offshore (Dim Sum) markets and it is on the latter that aspirations are focused in the battle to be European hub for renminbi issuance. Germany may be China’s largest European trading partner, but Frankfurt faces an uphill battle to overcome Luxembourg and London, which already boast strong renminbi capabilities. Nonetheless, Germany’s orchestral manoeuvres are clear: already a maestro within Europe, it has its eyes on a global audience.

To see 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. For more than three decades Audi, the majority-owned subsidiary of Volkswagen Group, has used the German phrase “Vorsprung durch Technik” – progress through technology – as the strapline for its television adverts. German cars have certainly earned a global reputation for high levels of technical quality and reliability. The same could be said of their bonds, which are attracting high ratings, strong investor demand and low yields. But a heavy funding schedule over the next few years combined with a hefty refinancing programme, the big three manufacturers – Daimler and BMW as well as VW – will test investors’ appetite for the debt. All three have taken advantage of the positive market reception to a high-octane sales performance in the first quarter of 2014. Daimler saw sales surge ahead by 14% while BMW enjoyed 8.7% growth and VW’s passenger car business expanded by 3.9%. “Given the strong sales momentum for German car makers and the ongoing refinancing needs of the companies, it came as no surprise that car companies tapped the credit market,” said Frank Hussing, senior credit analyst at Commerzbank in Frankfurt. “For the operational metrics the three companies are doing very well in the first three months and I would expect very solid operational cashflow for the next six to nine months.” BMW came to market with a €1bn floating-rate note offering. Daimler issued an FRN deal and a sterling benchmark bond offering, while VW was able to come to the market with two new hybrid issues raising a total of €3bn. But even these bulky totals are overtaken by the companies’ refinancing needs. Hussing points to VW’s €25bn refinancing requirement in corporate bonds over 2014 and 2015, Daimler’s €13bn and BMW’s €11bn. VW’s funding needs alone outweigh the combined €15.5bn requirement of Fiat, Peugeot and Renault. On top of that, companies will need to issue new paper to raise extra funds. Their strong cashflows mean that they do not tend to need finance to fund their manufacturing operations. Instead, demand is driven by the needs of their financial services arms that finance the 70% of car sales that are done through leasing or customer credit. “German car companies have been very successful in recent years so with higher car sales, of which a considerable portion is financed or leased, this will ultimately lead to greater financing needs for their financial services business,” said Christoph Seibel, head of corporate debt capital markets Europe at RBC Capital Markets. On top of this, the companies also need to come to the market to finance corporate activity. VW’s €3bn hybrid bond issue was taken out to finance its offers to take full control of Scania, the Swedish truckmaker, in which it holds a 62.6% stake. Panda bear market China is becoming an increasingly important market for German car companies, whose reputation for quality is attracting well-heeled Chinese buyers who particularly want SUV models. “German car companies have an excellent model pipeline. I think the growth story is there for the next two years at least,” said Hussing. “I would expect that these companies will have to do a bit more of refinancing over the next two years because the business of the three German autos is growing very fast in China.” In March, Daimler sold a Rmb500m (US$81.5m) Panda bond to Chinese investors – the first foreign, non-financial bond issue in China’s domestic market. “For Daimler, it is due to the business in that country and is a natural hedge against costs,” said Hussing. “It makes sense from a company point of view to launch such a kind of issuance. It is too early to say if this is a trend as it depends on the business there.” German car companies have also raised money in South African rand, Mexican pesos and the Brazilian Real. “They are very good at diversifying their fu

To see 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. Germany is riding the crest of a property wave. According to research from real estate adviser Savills, the country saw investment in commercial property of around €9.9bn in the first quarter of the year – a hefty 40% increase in turnover year on year. A sign of how significant that is, is that in volume terms it snaps at the heels of the final quarter of 2013, traditionally the busiest period of the year, which saw €11.4bn of investment.  It is the same for residential property. Most indicators forecast that the upswing in the housing cycle will continue well into 2014. The ifo construction survey reflects the high demand in the sector. Last year, for example, there was a double-digit increase in the issuance of residential building permits – for the fifth year in a row. “The ongoing favourable financial and economic parameters are increasingly joined by a rising risk-embracing attitude of investors so that the investment market in Germany is now definitely no longer limited to core,” said Andreas Wende, chief operating officer and head of investment at Savills Germany. Traditionally, the Germany property market has been focused on the Big Six – Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne and Munich. The rest of the country has not had much of a look-in. The rental figures would appear to confirm this. The average rent in five of the six cities was higher, in the case of Cologne by as much as 15%, according to Savills. Only Frankfurt saw a slight decline of 2.8%.  But what is interesting is the yield seen in these cities. The prime office yields in five of the Big Six cities have declined – Dusseldorf by as much as 30bp to 4.6%, while only Munich held steady at 4.3%. What has happened is the long-awaited push away from the Big Six. “We are now seeing demand for either B locations in A cities or A locations in B cities,” said Markus Kreuter, head of Deutsche Bank’s mortgage-backed securities business. University towns such as Heidelberg and Freiburg have long been tipped and they are beginning to break through. Although in terms of costs it remains high and in terms of yield it is still near the top, for the first time in years, Berlin was not among the five top locations in terms of transaction volume in Q1 2014. Instead Kiel, Bremen and Moenchengladbach all recorded larger volumes.  But more than that, properties in former East Germany are coming to the fore. Despite the low starting point, many cities are starting to see significant investment. Provincial capitals such as Magdeburg, centres of manufacturing, especially those with an airport like Dresden and dynamic cities such as Leipzig have all seen a pick-up. Indeed, two of the three biggest commercial transactions in Q1 were in the former east – the Unibail-Rodamco €540m purchase of CentrO in Oberhausen and the Morgan Stanley/Redos €400m purchase of four shopping centres in Eastern Germany and Berlin.  This is especially attractive to increasingly yield-hungry, yet still cautious investors. With a spread of anything between 300bp and 500bp over Bunds for German property, no wonder both insurance companies and pension funds are upping their allocation of real estate in their portfolios. The CentrO deal above, for example, has a yield of 4.4%.  The other result of the boom is that banks and private equity have taken advantage of building enthusiasm either to refinance their portfolios or to sell stakes. What has certainly driven the investment is M&A activity. “Germany saw €78bn of M&A activity last year, of which 18% was in the real estate sector. That makes real estate the second-largest sector after telecoms,” said Alexander Doll, co-chief executive of Barclays Germany.  The first quarter of the year was driven by three weighty deals in the residential sector. In February, Immofinanz subsidiary B

To see 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. Overall, Germany’s infrastructure is enviable. Germany scored an overall 6.2 out of 10 on the infrastructure rankings of the World Economic Forum’s 2013–14 Global Competitiveness report. It fared better than the US, which was only rated 5.7 out of 10 for the overall quality of its infrastructure. Today, though, roads and other infrastructure built more than 20 years ago are starting to show some serious signs of decay, and although the German authorities have said infrastructure is a concern, no one is quite sure whether anything significant will be done in the near term. Infrastructure spending has been, and still is, a small part of the German budget – a mere 0.6% of GDP, said Aaron Visse, portfolio manager at Forward Investing, which is insufficient for a developed economy. “Germany has had an irrational fear of inflation and that has led the country to follow policies of austerity for years,” he said. “The amount that’s spent on infrastructure is far too low for its proper upkeep and maintenance.” Proper infrastructure is the backbone of any economy, Germany’s included, and more needs to be done to keep the country’s infrastructure networks in a good state, said Thomas Brehler, global head of transport and social infrastructure at KFW-IPEX Bank in Frankfurt “Our aim now should be to concentrate on maintaining the infrastructure we have,” said Brehler. “We’re seeing a number of warning signals now that the time has come to do something about heavily trafficked roads, railways and bridges, which are showing signs of over-usage and wear and tear.” “Germany has had an irrational fear of inflation and that has led the country to follow policies of austerity for years. The amount that’s spent on infrastructure is far too low for its proper upkeep and maintenance” A number of groups have issued reports stating that failure to invest properly in areas such as transportation and schools could hamper future economic growth. A report from the German Institute for Economic Research issued in June 2013 stated that Germany’s potential annual growth could slip to 1% from 1.6% by 2017 if infrastructure concerns were not addressed. Germany’s response thus far has been either to increase tolls on heavily trafficked roads or even close some of them down. The way forward Brehler believes one of the best solutions for upgrading infrastructure would be to bring in the private sector through the increased usage of public-private partnerships . PPPs have not been as common in Germany as elsewhere in Europe, but there has been some interest. PPPs have been employed in a number of ways, such as motorway-widening projects to increase autobahn lanes. The A-model A8 Motorway project is a good example. The first of four pilot projects, the PPP scheme that involves Dutch company BAM PPP, aimed to widen a stretch of one of Germany’s most heavily used motorways. The scheme was financed in 2007 and is backed by vehicle tolls collected on behalf of the federal government through a 30-year concession. The first A8 project was followed by several other A-Model road schemes, while other projects such as the A7 and the A94 are expected to follow. Experts are also hoping that the rolling out of the European Investment Bank’s Project Bond Initiative, which aims to shift the burden of infrastructure financing across Europe away from the states and banks – which have always played an important part in extending loans – to the institutional investor market, will also take hold in Germany. Certainly, the idea has appeal in Germany, and although there are still some legal hurdles to be cleared, both the public sector and bond investors are willing to overcome these obstacles, said Daniel Reichert-Facilides, a partner at law firm Freshfields Bruckhaus and Deringer, “the former, by structuring the procurement

To see 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. While the sense of crisis in the European financial system has eased in recent months, the true state of the Continent’s banking system remains a mystery. In most cases there is little information in the public domain about bank balance sheets, with even regulators having little understanding of the risks banks are taking. But as consensus builds that banking union is the only viable option for getting closure following Europe’s bruising sovereign debt crisis, politicians have recognised the need to take a close look under the hoods of Europe’s banks. “Any financial risk mutualisation must be preceded by a credible removal of legacy risks resulting from past national banking policy choices,” said Nicolas Veron, senior fellow at think-tank Bruegel and visiting fellow at Peterson Institute for International Economics in Washington.  European authorities have a three-pronged strategy for making this assessment: a supervisory risk assessment analysing balance sheet risks such as liquidity, leverage and funding; an Asset Quality Review; and a stress test. Black boxes For now the AQR and the stress test remain black boxes, with no details concerning the methodology yet to be finalised. Predicting which institutions will be flagged up with problems is therefore impossible. What is known is that banks failing the AQR process will require restructuring, although even here, important decisions about that process have yet to be taken. In terms of methodology, “there are initial exemptions for smaller banks with a balance sheet total under €30bn, a category that includes most German saving banks and co-operative banks, but the ECB can later choose to supervise them directly as well”, said Veron. The omission of large parts of the German banking system from the assessment is not ideal, meaning any picture that emerges will be incomplete. But it is hard to criticise the authorities for this given the size of the ECB’s task; regulators lack the resources to scrutinise every bank in Germany, let alone Europe. And observers generally seem comfortable with the thresholds for inclusion that have been set. It is also possible that the ECB will expand its scope over time, bringing more smaller German banks under its influence. “This is likely to be especially sensitive in Germany, where savings banks and co-operative banks are subject to highly specific oversight regimes,” said Veron. “But leaving these banks permanently outside of the ECB’s direct authority may also give rise to perverse incentives and regulatory arbitrage, which in turn could generate potential instability over the longer term.” The question is, how valuable will this partial picture of the German – and European – banking sector be? “The AQR will capture a significant proportion of the troubled banking system,” said Veron. “German savings banks, which are not included in the AQR, may have problems, but they are not now a source of systemic risk for Europe. When they have encountered problems they have always been quietly rescued by their neighbours and local government. In the long term there is a risk of regulatory arbitrage but there is no great short-term risk.” Anybody’s guess Without more clarity about the process it is very difficult to predict the outcome of the AQR and stress tests. But the process is likely to be rigorous, with a number of failures expected, said Christian Dubs, a financial analyst at Julius Baer. These are unlikely to come from those countries that have already received European assistance: banks in those countries have already provided greater disclosures than most, meaning there is less potential for surprises. However, these represent only one-quarter of the banks to be subjected to the AQR, with only about 20% of total assets, said Veron. “Issues are more likely to arise for banks with r

To see 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. For years, Frankfurt has wanted to elbow its way into the lucrative Dim Sum market. At a conference on that theme last year, Bundesbank executive board member Joachim Nagel said: “Frankfurt can be more than a niche player. In the future, I can imagine that German companies would like to have the opportunity to do all trade-related renminbi transactions via Frankfurt.” A line was drawn in the sand at the end of April when German government-owned development bank KfW sold the first Frankfurt-listed Chinese renminbi issue through Commerzbank and Deutsche Bank. The new May 2016 offering was priced with a yield of 1.375%, in line with guidance of 1.375%, and during bookbuild doubled in size to Rmb1bn (US$160m). “The first listing of a renminbi bond on the Frankfurt Stock Exchange emphasises the significance of Frankfurt as a financial centre… It also represents a macroeconomic effort, which we welcome, particularly with regards to the potential benefits for the export-oriented small and medium-sized enterprises,” said Guenther Braeunig, responsible for capital markets and a member of KfW’s executive board. This year, Dim Sum issuance has been on a roll. The first quarter of 2014 saw Rmb125bn of bond sales, according to Thomson Reuters data, the highest quarterly level on record. This was despite a 3% decline of the currency versus the US dollar, which meant that issuers had to offer attractive levels to snare investors. Much is in Germany’s favour to be a Dim Sum centre in Europe. For years, Germany has been China’s largest counterparty in Europe, with €162bn of trade last year, according to the federal statistical office. A positive step forward was taken in April when China became a trading and clearing member of Deutsche Boerse. “In the light of continuous fast internationalisation of the renminbi, the building-up of a strategic co-operation between both parties will lead to a win-win situation,” said Bank of China chairman Tian Guoli when the deal was announced. But the harsh reality is that the European playing field is too busy for Frankfurt to dominate. The largest volumes in Europe of renminbi-denominated investment funds and Dim Sum bonds are listed on the Luxembourg Stock Exchange, while London handles almost two-thirds of renminbi trade outside China, according to Swift, the Brussels-based Society for Worldwide Interbank Financial Telecommunication.  Some would argue, however, that there is little need for rivalry. The Dim Sum pool is big enough for all and there is scope for Frankfurt to become a specialist in the field. A recent report from PwC suggested that rather than squabble among themselves, the financial centres of Europe should work together and play to their own strengths: London in trade and foreign exchange; Germany in goods trade; and Luxembourg in investment and asset management.

To see 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. How the mighty have fallen. The Pfandbrief market, Germany’s covered bond market, used to bestride the European capital markets. Only a decade ago, and driven by public-sector covered bonds called Oeffentlicher Pfandbriefe, issuance comfortably topped €1trn a year. But then, in 2005, the EU got rid of the guarantees that protected the ratings and cheap borrowings of the German Landesbanken. No guarantees meant little impetus for public-sector lending. Virtually overnight this meant no need to refinance and no more Oeffentlicher Pfandbriefe. Issuance fell off a cliff. According to Barclays, gross supply across Europe in the first quarter this year was €40.8bn. This is an improvement on the same period last year, which saw €37.5bn of issuance, but still a pale shadow of its former glory. The bank predicts €130bn for the entire year. The figures appear even more gloomy in Germany, where the share of Pfandbriefe in the total bond market declined from 32.3% at the end of 2004 to 3% at the end of last year, according to Deutsche Bank. “While the number of Pfandbrief issuers is increasing due to smaller banks entering the market and also total Pfandbrief issuance increased slightly in January and February compared with the same period in 2013, net Pfandbrief issuance will still be negative in 2014,” said Bernd Volk, head of European covered bond and agency research at Deutsche Bank in Frankfurt. “Total Pfandbrief redemptions of around €76bn in 2014 compare with an estimated annual issuance volume of around €50bn – in other words net supply could be negative by more than €25bn,” he said. It is the issue of redemptions that is key to the market. Until 2005, Oeffentlicher Pfandbriefe tended to have tenors of 10 years. These bonds will all have matured by next summer, ending the long period of negative net supply. But this long and slow contraction means investors have not been able to reinvest their redemptions. As a result, demand for covered bonds remains higher than ever and is precisely what is driving the keen pricing. “The tight levels we have seen in recent deals come from the negative net supply. If you have a limited scope of where you can invest your money, even a covered bond at mid-swaps plus 10bp can appear quite attractive,” said Torsten Elling, co-head of rates syndicate at Barclays. In February, for example, 47 investors jumped on WL Bank’s new €500m three-year covered bond despite the mid-swaps minus 11bp price. That pricing level might appear extreme, but it is not wholly unique. Also in February, although the deal struggled slightly to get away, Commerzbank sold a €500m five-year flat to mid-swaps, predominantly to domestic investors. The dynamic of the tightness of German paper even to agency debt is unlikely to go away soon. Several covered bond bankers refer to two different deals in mid-April that express this clearly. Bayerische Landesbodenkreditanstalt (BayernLabo) sold a €500m 1.75% 2024 issue at mid-swaps plus 8bp. At the same time, the Council of Europe Development Bank, a financial institution that finances social projects, sold a similar-sized conventional bond with the same tenor. But CEDB’s €500m 1.75% 2024 came 4bp wider at mid-swaps plus 12bp. Competition “Competing supply from SSA issuers is having an impact on covered bond supply patterns,” said Christian Klocke, head of DCM bonds syndicate government bonds at Commerzbank. Germany has had the covered bond space its own way for too long. The rest of Europe is starting to think about the covered bond format more seriously again – and it is offering more of a pick-up. Close to home, in April Societe Generale sold a €750m 10-year covered bond issue at mid-swaps plus 26bp – a distinct pick-up of at least 14bp over similar German paper. The tightness of German issuance is having an impact on teno

To see 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. Like Ratty and Mole in The Wind in the Willows, Germany has always liked messing around on the water. Its modern economic incarnation may be as a large and worthy Central European industrial machine, but its heart once throbbed to the ebb and flow of the Baltic Sea and the open waves. For four centuries from the late Middle Ages, the city of Luebeck lay at the centre of the Hanseatic League, a commercial federation of guilds that supervised trade on Northern Europe’s high seas. Even today, many Germans still go a bit wistful when the salty ocean hoves into view. Alas, the country’s banks have been messing around a little too much with the global shipping industry over the past decade – to their detriment. From mighty names such as Deutsche Bank and Commerzbank down to tinier regional lenders, many of Germany’s banks are in a rum old state. A report issued by Moody’s in December found that “prolonged weakness” in the global shipping industry since 2008 had “raised credit risks for German banks”, which rank among the world’s largest shipping lenders. Nearly six years after the financial crisis, shipping firms are struggling to service debts to German lenders, pushing up non-performing loans across the industry. Nor is this problem set to be solved any time soon. German banks controlled around one-third of the US$475bn global ship-finance market at the end of 2012. According to Swen Metzler, an analyst at Moody’s in Frankfurt, total shipping-related NPLs reported by German banks rose by 30% in 2012, to €21bn. Last year’s data are not in yet, but Metzler said there was a “high likelihood” that the quantity of soured loans rose further in 2013.  Herein lies one of the industry’s most pressing problems. The shipping industry is one that enjoys precipitous highs – the industry expanded exponentially for nearly a decade from the late 1990s, benefiting from the rise of China as a great maritime trading nation. But the lows are also concomitantly long. The container industry sank into recession in 2008, when the global financial crisis triggered a slump in global trade, remaining there ever since. In May, Germany’s largest shipping firm, Hapag-Lloyd, posted a net first-quarter 2014 loss of €120m, up from €94m in the same period a year ago, due to low freight rates and a weak dollar, despite a rise in transport volumes and the return to health of Europe’s largest economy.   Rocky shores Germany’s banks, which have an intimate and longstanding attachment to the shipping sector, now find themselves in a tricky situation. Do they stick with an industry struggling to extricate itself from its longest recession in 70 years, fold and cash in their chips, or twist, increasing their exposure to an industry that should, in due course, emerge again into profit? Some have already chosen the middle option. In December 2013, Commerzbank sold a portfolio of shipping loans to US-based distressed debt specialist Oaktree Capital Management for €280m. In February 2013, the Frankfurt-based lender said it had achieved its goal of paring its total loan exposure to the shipping sector to €14bn, three years ahead of schedule. Others face a more odious dilemma. Moody’s flags up eight lenders with “sizeable shipping exposure relative to their capital positions”, including five – DVB Bank, HSH Nordbank, KfW IPEX-Bank, Nord/LB, and Nord/LB subsidiary Bremer Landesbank – which are, the ratings firm said, “most exposed to persistent stress” in the sector. At end-2012, Moody’s said, the eight banks had a total of €105bn of shipping loans in their combined portfolio, comprising 137% of total Tier 1 capital. Soured loans, Moody’s said, had risen to 21% of all shipping-related lending at the eight banks by end-2012, up from 14% the previous year. The antiquated nature of this data surprises anyone not involve

To see 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. If the “Ruhr Metropolis” – as tourism officials like to call the EU’s third-largest metropolitan region after London and Paris – is distinctive for anything beyond its history of industrial decline and subsequent reconstruction, it is for sprawl. But Germany’s only megacity, with a population of 12m in the western state of North Rhine-Westphalia, is in fact polycentric – an urban hydra with many heads. It is the co-operation between at least 20 cities and other districts blending into each other within this vast industrial landscape that makes it something of a social and economic experiment. And just as the grand burghers of the cities swallowed up by the metropolis have learnt to find innovative solutions to common challenges, they are today charting a new course in public finance through unprecedented levels of co-operation in the capital markets. A groundbreaking joint issue in February of Germany’s largest municipal bond to-date by six NRW cities highlights that level of co-operation, now driving innovation in the muni market. “This was something that took a lot of work to bring to the market, but issuing a €400m muni bond in this way really was pioneering for all parties involved – for the cities and for the banks – and we were all extremely pleased with the outcome,” said Robert Mandziara, a director in HSBC’s capital financing division. “Being able to reach the €400m comfortably and having a subscribed book and high-quality orders from asset managers all over the investor range in Germany was really exhilarating.” With Deutsche Bank, Helaba and HSBC as leads, the €400m NRW Staedteanleihe No 1 issued by the cities of Dortmund, Essen, Herne, Remscheid, Solingen and Wuppertal – Germany’s largest muni bond to-date – made a successful debut with a February 2018 deal. Joint municipal bonds have been under discussion for years and this was not the first of its kind – in May 2013, Nuremberg and Wuerzburg issued the first joint bond, raising €100m – but the NRW bond represents new territory because of its size and complexity. The move towards munis is a reflex by cities seeking greater independence from banks on which they have traditionally relied for loans – in 2013, banks accounted for 99% of outstanding municipal debt. In a sector comment issued in February, Moody’s pointed to an expected tightening of lending from such traditional sources. Joint bond adventures Harald Sperlein, lead analyst for Moody’s on the German regional and local government market, said that while bank lending had been and remained popular among cities, they were seeking other funding sources and opportunities to tap other investor groups. A joint bond allowed them to share bank costs related to the actual transaction while providing a “critical mass” in terms of volume to attract the attention in the markets of new investors seeking a certain size of issuance. “Some larger municipalities and cities are aware of these developments in the banking sector and want to be more proactive and more independent of the banks in the future, so they are exploring new opportunities and hear reports from other market participants and the press that such bonds are not more expensive than a direct bank loan. This is a competitive funding opportunity for the municipalities,” he said. New Basel III capital adequacy requirements are likely to deepen this trend, making bonds increasingly attractive. “Let’s be clear: they will always tend to use their classical or traditional ways of funding – their bank contacts,” said Carsten Lohle, director of capital market and treasury solutions at Deutsche Bank. “Whenever possible they will stick with their banks and that makes a lot of sense: you can’t just suddenly switch to 100% capital market funding. So not every smaller city will have the need to go down this route

To see 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. That massive uncertainty caused investors to seek relative security in German Bunds, causing yields to plunge to record lows at the same time as yields on peripheral bonds widened. In November 2011, the spread of two-year Italian BTPs over equivalent Bunds was 500bp, tenfold higher than where it stood in more peaceable times. As the single currency’s largest member, Germany had been urged by more southerly members to use its financial stability to help prop up the area as a whole. The country gradually accepted its role as the euro’s bulwark but has still been reluctant to endanger its own creditworthiness.  The principal point of tension came from Germany’s insistence initially that it could not back the provision of support from stronger core countries such as itself without weaker eurozone members also playing their part and agreeing to the conditions of such assistance. This core disagreement was only really resolved in July 2012, when Mario Draghi, president of the European Central Bank, said he would do whatever it took to save the euro without spelling out exactly what measures would be deployed. Recognising the ECB as a de facto lender of last resort – something the Bundesbank was reluctant to allow earlier in the crisis – in effect allowed confidence to return. However, by then other austerity policies were already in place alongside a swathe of financial regulatory reforms. Mostly notably, these have included formation of the €500bn European Stability Mechanism, with Germany as its largest shareholder, and the banking union, involving single supervisory and resolution mechanisms for all the eurozone’s banks. “Germany’s role is now much more forward-looking as opposed to one that requires addressing immediate issues,” said Klaus Deutsch, senior economist with Deutsche Bank. Exit centre stage “Germany has moved from being at the centre of designing programmes of economic support and structural reform, to playing a key part in strengthening areas like banking supervision, for example, and providing the institutional support needed to create mechanisms that would enable the smooth resolution of bank insolvencies,” said Deutsch.  Even in this respect, Germany has moulded the reforms to suit its banks’ own situation. Banking union was originally also meant to include a single deposit guarantee scheme across the eurozone but Germany’s smaller savings banks, which have their own such scheme, balked at this. Eventually the scheme was shelved and a smaller resolution fund set up. In addition, the ECB, again on Germany’s insistence, is now only to have direct responsibility for the largest 130 institutions across Europe, with national supervisors, such as BaFin, retaining control of smaller lenders. While there are still a host of issues that countries such as Spain, Greece and Italy need to tackle, it is clear that the pressure that existed in Europe at the height of the crisis has diminished greatly. The yields on those sovereign bonds have narrowed noticeably to below 5% as Germany’s have normalised. Italy’s 10-year spread over Germany is now 150bp. “There’s less need today for European summits and for the rapid negotiation of funding packages that we saw through the worst of crisis,” said Holger Sandte, chief European analyst at Nordea. “Germany – and Angela Merkel – no longer need to sit at the table and cite the conditions countries need to meet if they want the cash. And although German politicians still insist reforms must go on, the decisiveness with which countries are dealing with their problems is encouraging.” Germany has also appeared keener than eurozone colleagues in raising the possibility of renegotiating treaties to clarify the position of non-eurozone members, principally the UK, in the EU, post these crisis-inspired eurozone reforms. Assuch Germa

To see 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. They seek them here, they seek them there. Those growth-hungry investors seek them everywhere. Collectively speaking, Germany’s Mittelstand is hardly the Scarlet Pimpernel, the fictional English baronet who saved revolutionary-era French aristocrats from the guillotine, but there are more than a few adumbrations of Baroness Emma Orczy’s enigmatic character. For one thing, it’s never been particularly easy to define Germany’s world-famous Mittelstand, which rose from the ashes of World War II to become a force of industry revered at home and replicated (wherever possible) from Britain to Brazil, and Singapore to South Africa. They remain elusive, hard to define or pinpoint. “It’s always been a little difficult to define what size, scale or area of business a typical Mittelstand firm occupies,” said Michael Wolff, Germany-based managing director at Robert W. Baird. “They tend to be private family-runs firms, tightly held, and with annual revenues ranging from tens of millions of euros to tens of billions. Some would say the local butcher with two employees is part of the Mittelstand family. Other would include a global auto parts maker in the category. The list, really, is endless.” The vast majority, though, are best characterised as very well-run small and medium-sized enterprises, beloved by investors, and for good reason. Mittelstand firms tend to invest wisely and plan ahead, with the best expanding, alongside larger corporate customers, into East Asia, Latin America and Africa. They occupy highly profitable corners of the industrial world, specialising in everything from printing presses and plastic tubes, to cooling machines and wind turbines. Germany has more than 1,300 globally scaled Mittelstand firms, against just a few dozen in each of the UK, France, and China, according to a 2013 report, “Hidden Champions”, from Biesalski, a Munich-based consultancy. Few scrimp on research and design. Spending on R&D rose by 71% between 2004 and 2010, according to data from German-owned development bank KfW and IfM, a Bonn-based SME research outfit. Exports jumped 30% in the first decade of the century to €186bn, comprising one-fifth of all German-sourced overseas trade. Yet few Mittelstand companies ever make it to market. They remain elusive and surface in the capital markets only very rarely, and usually on their own terms. Initial public offerings of this breed are as rare as hen’s teeth. When they do crop up they tend to be found, said Armin von Falkenhayn, head of financial institutions group at Deutsche Bank, “where the growth capital is needed”, in sectors such as technology or healthcare. Industries, in short, with the greatest need for fresh funding to sate sometimes hefty R&D bills. Over the past 18 months, only a tiny handful of good-sized Mittelstand companies have hit the market. Evonik, an Essen-based chemicals firm, is perhaps the most prominent among investors, if only because it took three swings at its listings before finally raising €345.1m through its initial Frankfurt stock sale in June 2013. Kion, a Wiesbaden-based maker of industrial equipment, from forklifts to heavy trucks, raised €420.285m through its June 2013 IPO, also in Frankfurt. More recently, SLM Solutions, a cutting-edge 3D printing group based in the northern town of Luebeck, raised €180m from its initial stock sale, with primary proceeds fixed at €75m, putting the free-float at 49%. Yet this still seems a pretty meagre return, particularly at time when European firms, notably those based in Britain and Nordic countries, are lining up to sell shares to an eager, global investor audience. The rather vexing truth, at least for funds and investment managers desperate to increase their exposure to the best and brightest firms in Europe’s largest economy, is that many, if not most o