IFR German Corporate Funding Roundtable 2017: Part 3

IFR German Corporate Funding Roundtable 2017
17 min read

Keith Mullin, KM Capital Markets: Dominik, you referred earlier to client solutions over product solutions. As has been mentioned, whereas before product teams within a bank would sometimes compete for a deal, there is a more collegiate environment as platforms have evolved. I was curious to understand how much interoperability there is between various market segments.

Dominik Müller, Commerzbank: I think your question is basically trying to summarise many of the aspects we have discussed today. Banks these days need to be capable to deliver the products. That’s a given. Secondly, it’s far more important that you actually present solutions to companies. It’s not just about simply providing a service around a certain product.

Thirdly, I believe Anthony mentioned it at the very beginning: timing is very important, particularly at times where clients have full optionality. Basically, where companies have full market access and they can choose whatever product best fits, it becomes very important to choose exactly the right time with the right product.

When it comes to getting the best possible solution, the loan product is one of the most flexible products. In acquisition financing scenarios, for example, the most important aspect is to provide substantial amounts of capital in a very short timeframe in the most flexible manner and then make use of different take-out instruments leading to a refinancing in the capital markets. So there’s a lot of interaction of different instruments tapping different market segments at the right point in time.

Christian Reusch, UniCredit: Banks need to be much more flexible these days. You don’t want to end up in a situation whereby a bank has been banking a client for 50 years, always did the loan every three years and at the time the client was happy but then suddenly you discover someone else came around and pitched a Schuldschein or something else and suddenly the 50-year relationship is not exactly falling apart but is certainly challenged.

Going into a client discussion with one product is super old-fashioned and is also not suitable to the client’s needs. There might be a situation where A, B and C fit better than at other times. It’s about having the right combination and the ability to be flexible on both sides that allows proper conversation.

Ingo Nolden, HSBC: But in order to deliver this you need good people. [Given what’s happened to the banking industry since the global financial crisis] I think we are all facing challenges there.

Henryk Wuppermann, E.ON: We’ve talked so far about companies re-leveraging and doing acquisitions and things like that, or smaller clients experimenting with new products like tapping the bond market for the first time. Actually it’s the job of the corporate to make sure they don’t get over leveraged. Banks will obviously want to keep an eye on that as well if they underwrite something but ultimately it’s our responsibility.

Given where markets are, I sometimes feel bad for smaller clients who get pushed into something, which if markets become more volatile will create problems. The bond market is not perfect. You can’t place a bond at any time whatever interest rate you put on it. If you are a one-time issuer with a €300m bond and you need to refinance and find yourself in a 2008-09 kind of year, that’s going to be hard to cover up. Bear in mind all the firms who issued in the M-Bond [mid-cap bond] market and then blew up. Banks should take care that this doesn’t happen again.

Dominik Müller, Commerzbank: Agreed, and they do. In Germany we have a lot of companies, be they multinationals, large or Mittelstand companies that are well positioned and conservatively financed. The fear you were expressing for companies to be in a specific situation and not able to refinance in a successful manner is only valid to a limited extent.

The variety and magnitude of companies we are dealing with in Germany on a daily basis are in pretty good shape right now. Even though market conditions might change, not in the near future but perhaps medium term, I would nevertheless believe that most companies are very sophisticated and capable of manoeuvring through more difficult times

Dominik Buric, LBBW: I agree with Dominik. If you look at the numbers, 70% of M&A transactions are financed firstly with bridge loans and afterwards with two to four financing instruments, depending on the size of the transaction. So it looks like companies are very responsible going into refinancing or take-out financing for important projects like acquisitions. I certainly believe they know what they are doing.

We have two great markets in Germany that they can address: the bond market and the Schuldschein market. The circle around those, of course, is a loan financing based on very responsible banks. For corporates it’s a great environment. I do not believe that anything in the future will harm this.

Keith Mullin, KM Capital Markets: Before we move on, Henryk, I just had it in my mind to ask you, because we talked about product fluidity, how important is your funding mix in terms of how you diversify by instrument, by currency, by investor type, maturity? What are the parameters around that?

Henryk Wuppermann, E.ON: I think all big companies, like ourselves, get pretty much all of our funding from capital markets, from bond financings. For investment-grade companies, there is no need to raise funding via banks. Actually, for some companies the bank market will be too small for them to fund.

Therefore our liquidity comes from bond investors. Since we primarily have euro revenues, we fund mostly in the euro market. We might also think about, say, tapping the sterling market; markets sometimes provide different advantages but our primary funding is the euro bond market.

We also have our back-up facility, which is not funding; hopefully it will never come to using it as funding, it’s more liquidity provision. That is done by bank facilities. We do this in the syndicated market, not via bilaterals.

Keith Mullin, KM Capital Markets: Are you happy to look at opportunistic drive-by financings or swap-driven opportunities?

Henryk Wuppermann, E.ON: Absolutely, we have done that in the past, obviously we have had limited funding needs over the past years so there was no need to do that.

Keith Mullin, KM Capital Markets: I wanted to move in the last session into expectations for 2018. We touched on some of them already but I just wanted to go round the table and ask each of you just to give some comments about what you expect in terms of the markets you cover and any challenges out there.

Ingo Nolden, HSBC: This year looks like a very constructive year. If were a corporate, I would be looking at the PE market and financing conditions in the low end of the high-yield market. I expect if we see some risk shifts on the investor side, better credits become too weak to really get them into this market, I would be looking at this. There could be some music in there in a positive sense to shake us out of this complacency. For the German investment-grade corporate guys, for the Mittelstand guys, it looks very solid and it will continue to do so because, as we have discussed today, they are very solidly funded.

Of course, there might be a bit of volatility in rates. The question is how will the ECB try to communicate the next steps? How will they do it? I don’t want to get into details about Brexit, German coalition talks, the future of the eurozone etc. This is all out there but it is not really derailing the market so we are very constructive for all market segments: loans, bonds, private placements. But we are looking very closely at the PE cycle.

With the ECB capping this market in terms of leverage, regulators are obviously looking at this. This is giving me some hope that they are very sensitive to this issue. They know global central banks are in an unprecedented situation. So behind the scenes there are interviews taking place: how is your balance sheet being financed? How are you preparing for the exit etc? So they are gradually trying to prepare the market. It should work. So far it looks very constructive.

Christian Reusch, UniCredit: We also remain quite constructive. The first half of 2018 should be a more or less easy ride. Although the ECB has cut back a little, at the end of the day if you look at things on a net-net basis, there’s still some decent purchasing power around, which certainly will make our markets quite constructive.

The trading range for the 10-year Bund is still 0.25%-0.75%. Moving up 50bp may at first glance look a lot but look at it on a long-term horizon: 10 years back 50bp was nothing. Spread wise, similar. There could be some setbacks as we saw early in the year but even if we get into more volatile situations, especially for the German mid-cap market, Schuldschein will become quite attractive.

It could also be attractive again for multinational corporates, which we saw two or three years ago, looking intensely at it and tapping the market with large-scale offerings across the curve. Spread sensitivity in SSD is less pronounced because you have a longer marketing period and while you have to swallow interest-rate risk as a borrower, you are much more locked in from a spread perspective.

I think 2018 at least will start too good to be true. The only shadow over the market probably because it’s a known unknown is how MiFID II comes into play. Does this really have an impact on the primary side? And if not on the primary, on the trading side? There are discussions along the lines of: “will it really start on January 3 2018?”. Probably yes but if you listen to some participants, I sense they’re dreaming that Santa Claus will come and postpone it for another year.

Anthony Bryson, BNP Paribas: I challenged Henryk a little on what you of course rightly mentioned about having seen difficult market conditions in 2008-09 but corporates still managed to get their funding done. Since then markets have been incredibly robust. So I question whether corporates still need to be so leverage-conservative in case something comes around the corner: the unknown unknowns.

Beyond that, I’m constructive for all the reasons mentioned but I’m also constructive for another reason: even if rates go up, the degree of sophistication and product awareness, not just among large corporates segment but in the Mittelstand too, is excellent these days. We have excellent high-quality discussions with corporates that have often never even done any public debt financing. We have treasurers that do tax accounting, controlling, equity, a bit of investor relations where appropriate.

The appetite for leverage I think is becoming a lot more, I don’t want to use the word modern, but more flexible in Germany. Not for the sake of it but simply because there is confidence in the markets and regaining confidence in the banking system. So even if rates go up, even if we see a couple of bumpy events along the road next year, in addition to what was mentioned earlier, I remain constructive.

Dominik Buric, LBBW: I would like to talk about challenges because we didn’t talk too much about them. One is adopting new technology into our primary business. This is something which will change things. Blockchain technology will be a game-changer in financial markets and corporate finance as it has disruptive potential. We led the €100m Schuldschein for Daimler this year using blockchain technology; it was an innovative way to collaborate with clients that we hadn’t experienced before as banks working on such projects together with clients. So technology is definitely a new challenge.

Second I would like to highlight sustainability. Green financing has been a larger topic for 2017 and of course will be in 2018. I personally believe this is something that goes deeply into smaller companies as well as large corporates. Together with BNP Paribas we did a Green Schuldschein for Mann+Hummel. That’s a good sign. The framework for green financing is clearer and there are a lot of investors, like banks and asset managers getting more familiar with that way of investing. This is a trend for 2018.

Third is how we will continue to apply solution-based platforms as a holistic corporate finance approach going forward.

Markus Wiedemann, Deutsche Asset Management: From a fundamental perspective, the environment is fine. The economy is improving, balance sheets are very solid. Over the next 12-18 months I don’t think investors will have to sell credit for fundamental reasons, generally speaking.

On the other hand, after another good year in terms of total return and total spreads, the index yield for European investment-grade is currently at 70bp. On the other hand, we’re not the only ones who are long credit. So it’s about positioning; going into 2018, the margin for error is rather small.

So whatever happens, rising yields were mentioned. I think we can all live with gradually rising yields but if there is a spike or a high inflation number or something, people will definitely think about their fixed-income investment if they’re

down 2% by the end of January or mid-February. That’s just a fact but that’s not our base case, which still remains constructive. The investment-grade corporate market overall will react much more in line with the overall European fixed-income market than on its own.

Henryk Wuppermann, E.ON: Last year felt a little like 2007. This year too felt like 2007 so you wonder when 2008 is coming so I’m looking forward to the New Year to see how things go. So far: extremely well but let’s remain cautious and remember that things can turn – and quickly.

Dominik Müller, Commerzbank: First of all, in Germany stable economic growth is predicted for this year and for next year. That’s a positive factor. On the other hand, this will certainly attract more market participants so competition will remain high.

Secondly, if you look at the overall market maturity profile in 2018, it will also be a year of moderate volumes. But this year has shown that market activity can change quickly even though a specific impulse for that can’t be seen right now.

Third, and I think this is a really important aspect, is the way the whole industry is changing in terms of digitisation. There are various developments impacting the capital markets, for example, through blockchain technology which has already been used in the Schuldschein and Euro-CP markets and will likely also reach parts of the loan market soon.

All in all, I’m optimistic that in 2018 we will see developments broadly comparable to 2017.

Keith Mullin, KM Capital Markets: Perfect. We’ll call a close there. Thank you all for your comments and insights.

To see the digital version of this roundtable, please click here.

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