IFR: Sandro, if the loan and Schuldschein markets impact on each other in terms of pricing what about the bond market? The bond market is playing to a slightly different set of factors, but clearly there’s a link. Can bond pricing continue to reduce, bearing in mind we’ve seen investment-grade corporates raising new issues with negative yields?
Sandro Pittalis, NordLB: Corporates selling debt with a negative yield is not that strange if you take into account how the CSPP is working. Corporate bond pricing will impact the loan market and the Schuldschein market, and vice versa. But it’s not that easy to predict how the market will develop in the next couple of months. As long as the CSPP is working the market will continue to be strange. What concerns me is the situation after the CSPP.
At the moment, it’s easy for companies to get debt financing and they’re getting funds at very good rates – from their perspective. But what concerns me is the investor perspective. Right now the ECB is the biggest competitor to investors. In searching for yield, there’s a tendency for investors to get move more and more into the trouble zone. I’m thinking about Versorgungswerke or pension funds where there is a need for capital in the next 10 to 20 years. This is really concerning me.
IFR: Bond investors have always been very focused on liquidity. But bond market liquidity has reduced dramatically, following the withdrawal of market-making capacity and other issues. What’s been the impact of the altered conditions?
Matthias Hellstern, Moody’s: The disappearance of certain market-makers has made it more difficult for high-yield issuers with smaller needs to tap the bond market. Investors are generally reluctant to invest in paper with a low liquidity. Therefore they are taking a long time to make decisions partly because they know they might not be able to sell.
When it comes to investment grade, I am already receiving calls from solid investment-grade issuers about how we would treat increased leverage if they were to issue a bond, put the cash on the balance sheet and cancel their syndicated revolving credit facility because it’s more expensive to pay the commitment fee, although I have not seen this happening yet.
Martijn Kamps, ING: That is an odd and unexpected development. We’ve seen examples in Schuldschein where a company has taken out its entire syndicated loan facility, including undrawn portions, cancelled it and put money on the balance sheet.
IFR: How is competition in Germany with regard to foreign banks?
Reinhard Haas, Commerzbank: If you look at syndicate structures on the loan side, the number of banks has reduced. Even in large-scale acquisition financings, it’s no longer common to see a broad range of banks being invited. Why is that? Because the loan itself doesn’t yield as much so the cross-sell becomes even more important. But it can’t be distributed to all the banks participating in the financing so you concentrate the number of syndicate banks to the minimum.
Differentiating between tiers becomes more challenging because the second and third-tier banks are less entitled to cross-sell so for them the economics equation does not meet expectations. The relative unattractiveness of the smaller tickets is why you’re seeing less tiering in syndicated loans. That hits foreign banks to a certain extent, not the very large banks very large or banks that feel at home in the German market because they that have a local presence such as ING, but it is definitely true for those who don’t have that kind of network.
SMEs were not so prone to being financed by foreign banks if they didn’t have a local franchise as much as large corporates. But it is true that you see second-tier banks disappearing out from the SME segment. There are a number of larger UK banks that have withdrawn, pretty much completely, from the German market because of that.
Thomas Haas, BayernLB: If you investigate the nationality of bank consortiums in the German SME syndicated loan space, before the financial crisis it was pretty international. During the financial crisis, it became very national. After the market recovered, it was suddenly very international again.
I have the feeling that there’s a tendency for it to become a little bit more national now, although there’s no drama because clients want small, efficient, club-like bank groups rather than a broad consortium with several tickets. All of that said, a lot of SMEs are very international and they really want international banks in their consortiums so there is a lot of movement but there will always be a mix of national and international banks.
Martijn Kamps, ING: As ING we feel very much at home in Germany, as Reinhard pointed out. ING-DiBa, the German retail part of our bank, has been around for 50 years [and has been part of ING since 1998]. We didn’t just drop into the German market without a sustainable strategy going forward.
On foreign competition, I agree with Thomas that there is a place for international banks that can provide a network, that have strong footholds in different countries and can find their way into cross-sell pockets in niche areas where they are stronger than national banks. If you are able to convince a client and be transparent about your intentions in a sustainable way and you want to develop a relationship, you have a good chance here.
Enrico Miketta, LBBW: With regards to the smaller SME segment, I agree with Reinhard. The more international the business model of an SME is, the bigger is the real need for an international player; and sometimes they do need a bank that has a footprint in Asia or wherever, where their core banks can’t offer similar service.
In that regard I feel some competitive pressure because banks that are able to deliver those kinds of services may have very good access to funding, say, in US dollars or other currencies. But that’s in the upper area SME segment; in the smaller area it’s more and more a German play.
Thomas Haas, BayernLB: One observation I’d make is that if you leave SMEs aside and look at the jumbo transactions in the market, the big M&A blue-chip transactions, you hardly see any German banks there. That is a totally different story.
IFR: How does the narrative around sustainable finance play out at a corporate level in Germany among industrial companies, particularly SMEs?
Reinhard Haas, Commerzbank: There is already a green Schuldschein market. It’s nascent and not as broad as the Green bond market but it is coming. Can there be a larger market in sustainable syndicated lending in general? If you look at banks and the reputation they want to build and maintain, it is becoming a much more important issue topic particularly given all that has happened and the scrutiny the banks have suffered over the last few years.
For example, some bBanks have now developed policies with respect to CO2 footprints and a broad range of considerations regarding environmental sustainability. Eventually that will evolve out of the realm of policy and become part of a bank’s portfolio strategy to show the outside world that sustainable investment is a necessary thing.
As soon as it becomes a part of the portfolio strategy, you create a need for paper that doesn’t just say it’s nice to invest in these issues but actually a situation where banks are actively seeking to invest. This is something we the industry can definitely develop and I believe there is a great future for it.
Matthias Hellstern, Moody’s: If you look at Green bonds, everyone can attach ‘green’ to ‘bonds’ and issue a ‘Green bond’ whether it’s green or not. There is no regulation, no default clause in the documentation. We are now assessing how Green bonds are and whether issuers of Green bonds have corporate governance structures in place that would oversee investment of proceeds and whether the company has a policy in place for projects that are considered green enough for the bond to be considered green.
Martijn Kamps, ING: What I am to some extent still missing is why there is huge untapped potential in the sustainability discussion with our clients. Whether it’s a bond or a Schuldschein, we tend to think in terms of: “let’s paint something green; let’s think about how we can put it into some sort of framework in order to get it green”. What we don’t do is have deep dialogues with our clients about what sustainability means for them or for us as a bank. This has huge untapped potential because we have still not really linked sustainable strategies to the way we finance companies.
Johannes Hack, DZ Bank: Because the guys sitting around this table come from fairly large syndicated loan and bond banks, I don’t think we are really seeing it to the extent that it’s already happening. When I look at what our local co-operative banks are doing, they are lending for energy efficiency, they are lending for things that are changing the environment today. It’s not lending to a Green bond; it’s lending so that some guy can renovate his air-conditioning or his furnace.
There are a lot of subsidised loan programmes in place in Germany to help that along. At the larger scale, you have the issue of a given company issuing half a billion euros of green debt and how that makes the company green. But that doesn’t mean it’s not happening at the grassroots level.
Thomas Haas, BayernLB: As opposed to an investor who sits on a pile of money and manages a fund that is just able to invest into Green bonds, a bank wouldn’t make a green investment just because it is green. Compliance officers are becoming more and more aware and we’re discussing a lot of lending and business opportunities with them. It needs to comply with the regulations you have and not just economics-wise.
But as Johannes points out, we have green products other than Green bonds. BayernLB is one of the largest providers in subsidised financing in Germany and we do a lot of project financing in solar and wind investments which banks are playing into in the syndicated loans space.
IFR: Enrico, it’s not the job of banks to force clients to be environmentally friendly; you’re financiers at the end of the day. But do you feel any pressure towards pushing sustainability at the client level?
Enrico Miketta, LBBW: LBBW is very strict around its own sustainability rating so I would put what Thomas said the other way around: even if there is an opportunity to invest in or arrange a syndicated loan that is attractive from a commercial point of view, if it doesn’t fit our internal sustainability rules we wouldn’t do it.
What is sustainability? What is green? As Matthias said, to a certain degree it’s subjective. If you look at a big utility company they have green areas for wind, solar, whatever but they still have carbon. To a certain degree, this is limiting us from doing business but I think it’s a fair strategy because that’s what our investors and especially our shareholders want.
The question mark is over companies that are not green in five or 10 years. There are already examples where funding of companies that are not green has become more expensive because the number of investors on the bond and on the bank sides will shrink over time. I think this will be a development in the next five to 10 years, not tomorrow but I am convinced this will be the case.
Sandro Pittalis, NordLB: My short summary is this: it’ll become a crucial part of our product portfolio in the future.
Matthias Hellstern, Moody’s: But it still needs to make economic sense. No-one invests purely for altruistic reasons. But with the Paris agreement having come through, there will be certain assets and companies that will have much less value in 10 or 15 years than they have today.
If you’re an insurance company that needs to invest in longer-term assets you probably won’t go into coal any more. This is what Allianz is doing because in 15-20 years coal assets are probably going to be worth significantly less, while oil in the ground might not have the same value in 20 years as it has today. You will have distressed assets that currently still have a high value. Even if you take a long-term economic view investors will have to adjust the way they are investing.
Martijn Kamps, ING: I agree with Enrico that green is a relative topic but what’s interesting about your question, is you asked whether we can push our clients in a more sustainable direction. Some banks and investors have policies in place that rule out certain types of investments. That is a way of incentivising clients because a certain product or a deeper market is not available to them.
But that’s not actively engaging with the client; you’re simply saying no to a proposition. Assuming you actively engage with the client and have a long-term relationship, it’s more about how you incentivise them, maybe via a loan product and maybe via tools you have in place in order to develop a deeper dialogue about what sustainability means. As an industry, we haven’t found a way to really start incentivising our clients but there is untapped potential there.
IFR: Why not create a green loan market?
Reinhard Haas, Commerzbank: Technically, if you’re talking about a drawn debt instrument you can define what the money will be used for but if you have a revolving credit facility with multiple uses, the task to define the uses you make of the money becomes much higher. It’s not that we wouldn’t want it, it’s just that it’s harder to trace. But creativity has no limits; maybe we will find a way to provide our clients with a green revolver.
IFR: To bring our conversation to an end, I’d like to ask each of you to make a closing statement. What’s on your radar screen? What are you excited about? What are you worried by? What keeps you awake at night? Will you make budget this year? What are you looking forward to in 2017?
Sandro Pittalis, NordLB: We talked about sustainability. In my view, the responsibility around this in the banking area as well as for our clients is crucial. We need to provide clients with strategic long-term solutions. Pricing is one thing, but the structures and the financing solutions we offer to them need to be viable.
In the capital markets, when I advise on corporate bonds I see a lot of competition. Finding a solution and coming up with a good strategy is similarly crucial for issuers as well as banks. What concerns me most is finding a sustainable and future-looking strategy in order to be and to stay a healthy competitor in a highly competitive market.
Johannes Hack, DZ Bank: At a micro level the situation of banks in Germany and in Europe causes a certain amount of worry because the business model is challenged and under a lot of stress. I think it’s fair to say that banks will have to deal with this inter alia by sharing costs and doing nasty things. That’s obviously not good. So at the micro level that’s a worry.
On a macro level, what worries me most is the fact that if I look around the globe people are becoming ever more inward-looking; free trade is receding and you see political developments that are quite unpleasant in places and there are a lot of unpleasant stress scenarios that could play out and go way beyond whether or not I make my budget this year. But I will make that budget.
Thomas Haas, BayernLB: The biggest task for a bank these days is managing RWA consumption and profitability so that will be a challenge in the years ahead. We are really keen on profiting from the very liquid capital market we have at present and I think there’s a lot of potential there going forward.
On the positive side, we have a very solid customer base in the SME space. Prices are low and everybody knows it creates pressure on the other side but our customers are more about relationship banking and having long-term perspective financing partners. Going forward, this will hopefully be a big plus for relationship banking.
Enrico Miketta, LBBW: I’m convinced that relationship banking is becoming valuable again. As long as the banks put the client at the centre, try to understand the entrepreneur and the company, and focus on solutions then maybe the situation is much better than we think.
On a global perspective I’m with Johannes: I am concerned about the many wars around the world and the lack of strong leadership in the world’s major democracies. That scares me personally and from a business point of view. Global central banks can do what they want to do with their money politics but if companies don’t have confidence they won’t invest. If they don’t invest then we are all useless around this table. On budget, we are quite happy.
Matthias Hellstern, Moody’s: We have a low economic growth environment. It’s not shrinking but it’s not growing very much either, which central banks are trying to fight. But it’s not happening so no-one is investing and growth will remain low.
The big question is what’s going to happen in China because this is probably the economy that has kept our economic growth at least positive. At the moment it doesn’t look too bad but there’s also a big question about over-valuations in real estate and bubbles that might burst.
There’s also a big question about elections both in the US and Germany, and what’s going to happen with Brexit. I’m also concerned with regards to headlines I’m reading about certain banks in Germany. This is really concerning and we need to watch it carefully.
Martijn Kamps, ING: I’m not so concerned. There are a lot of moving parts that could cause concern but we’ve seen a lot of volatility and shocks and markets seem to have reacted in a measured or composed way. What is very interesting and what I’m really excited about is how all the fast-moving parts or the uncertainties we currently have come together in four or five years. I would be very curious to see what type of conversation we would have then.
With respect to how we interact with our clients, there is a lot of change coming up and change is accelerating. It’s all about digitisation, blockchain technologies, the impact of regulation. There are a lot of moving parts and a lot of creativity is needed to still be around in four or five years’ time in decent shape.
Reinhard Haas, Commerzbank: I’d like to finish on a positive note. We live in extremely exciting times when you consider we’re on the brink of fundamental change in industry and the way industries interact. We will probably also see changes in the players that matter in these industries.
I don’t think the automotive industry will look the same within 10 years, with most of the large OEMs declaring new strategies and moving away from producing cars to being mobility solution providers. You see the same thing happening in the agrochemical industry: no longer just producing chemicals but nutrition solutions. It also concerns us as a financial industry where digitisation will fundamentally change the way our organisations work in the future.
It’s a good time to be active; it means certain things will have to be financed. We’re already here to accommodate that. It will be fascinating to see that happening so despite the challenges I’m optimistic that we will have some interesting times ahead of us.
IFR: Perfect, let’s leave it there on a high point. Thank you so much all of you for your comments.
To see the digital version of this roundtable, please click here
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org
|Mittelstand Schuldschein League Table|
|German, Austrian and Swiss companies with <€1.5bn in annual turnover (Jan 1 to Sept 30 2016)|
|Rank||Arranger||Pro Rata credit €m||Full Credit €m||No of Deals|
|14||Raiffeisen Bank International||37.46||74.92||1|
|Source: Thomson Reuters LPC|