The discussion may have taken place against a convoluted technical backdrop of large-scale ECB bond purchases and the concomitant distortion in European bond pricing just as the Fed moves into tightening mode; and a macro backdrop of low economic growth and geo-political conflict.
But even though the threat of volatility hangs over all participants, the market has held up pretty well if it’s at times been skittish. Roundtable participants were in relatively cheerful mood as they debated the issues and challenges facing German mid-cap corporates in their approach funding.
Challenge may be an odd word to use to describe financing optionality in a world in which bond yields have gone negative even in certain new-issue corporate bonds and the backdrop has rarely been better for corporates. As in previous years, though, the issue in Germany is not so much the extent to which financing access may or may not be curtailed. To be clear, it isn’t. The German loan market remains liquid and banks continue to be supportive of their corporate clients.
But here’s the challenge for SMEs: how to take best advantage of funding optionality that includes core bilateral, club or syndicated bank lines; private placements, Schuldschein, institutional loan carve-outs, and bonds as well international or international currency solutions for the more cross-border oriented companies.
It’s a challenge in that while corporate treasurers are being advised to maintain their core bank lines, they are at the same time being confronted with the notion of optimising their funding mix and making decisions about financing structures.
Pricing shouldn’t be the sole driver of decision-making in this area and banks are at pains to advise corporates not to put all of their eggs into one product basket in the interests of maintaining discipline, flexibility and the benefits of diversification.
But competition between banks and competition among product desks within banks combined with borrower enthusiasm to cheapen their debt stack is leading to top-of-the-market one-stop shop solutions driven by price. With a weakening covenant environment, caution is certainly warranted in certain areas.
For drawn funds, the Schuldschein market continues to be a favourite destination. The market has gained issuers and volumes at the expense of the bond market thanks to keener pricing and greater flexibility on docs. It’s not new to 2016 but a key feature of the funding landscape in Germany is fluidity. So SSD replace bonds for investment-grade issuers (and for some crossover names); Term Loan B facilities replace high-yield bonds and so on.
In so many senses, this is a nice problem to have for corporates. One question is why issuers haven’t taken more advantage of the conditions. But in a world of negative deposit rates, use of proceeds is a big driver of intentions. If treasurers don’t have an immediate use for the funds, it’s hard for them to justify raising funds for a rainy day.
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