Not much had changed at the macro level. The market’s loss of confidence was driven as much by a slightly backwards-on psychological shock that prices could even in theory swing so violently in a market in which ECB stimulus had rendered yield developments a one-way bet as it was by the risk of a Greek debt deal not being struck, China’s equity market wobbles and oil prices.
The market’s unsettled tone certainly made the speakers from the bond side at the roundtable a little more apprehensive about forward prospects – for large-caps as well as mid-caps.
For all the talk about debt capital markets, private placements, direct non-bank lending or other solutions providing mid-cap corporates with financing options, the reality – alas or fortunately depending on your viewpoint – is far more prosaic. Bank lending continues to be the instrument of choice for this segment of Germany’s corporate landscape, while the (much smaller) Schuldschein market remains open for business.
In that respect, little has changed structurally in the period between IFR’s 2014 Roundtable and this year’s outing. The banks are liquid and continue to provide credit lines to their mid-cap clients. And they have a reasonable approach to pricing-in the limited ancillary business available.
The tight competition that was mentioned as an issue in 2014 has by no means eased. Domestic banks are battling not just with each other but with foreign banks, which have returned to the fray in Germany with a strong intent to do business. The impact of this has affected not just pricing but structuring factors, too: covenant-lite is firmly back on the agenda as an issue.
One cause for concern is that the competitive situation has pushed crossover unrated names into the conservative Schuldschein market. During the discussion there was some divergence of opinion around such names. While some see unrated names as a predominantly sub-investment grade phenomenon, others say internal bank ratings for these issuers are closer to high-grade, so they are of less concern.
Private placements and direct lending by non-bank credit funds were broadly dismissed as posing viable financing options for German mid-caps. In the case of the latter, there appears to be little accommodation on price or structure to put deals together, while in the case of the former some German issuers do look at USPP, German corporates show no sign – at this point – of accessing the Euro PP market, notwithstanding the fact that German high-yield names could neatly fit the ideal issuer profile.
True high-yield issues with size requirements have continued to have a line into the high-yield bond market, but at the SME level, loan financing again takes precedence. The high incidence of defaults some years ago in the domestic Mittelstandsanleihe SME bond market has put this off the agenda, while it remains to be seen how the classic bond market reacts to price volatility and rate moves and if the window stays open into the medium term.
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