IFR’s 2021 German Mittelstand Financing roundtable was convened via video call in October. Covid infection rates were already rising at that point, but the discussion took place before the rising tide of Covid-related government actions and weeks before the new variant was discovered.
Hence the comments that follow in this publication should be read bearing in mind the time factor. Not that the basic thrust of the comments has changed; it’s just that if the discussion had been held today, it’s likely the speakers would have articulated their thoughts in a slightly different way. But that doesn’t detract from what was a lively and insightful discussion.
Clearly, the tone of the financial markets into the end of November had turned. Sentiment is more downbeat and volatile; credit spreads have widened. Depending on the data that emerges around the Omicron variant and how governments react to it, that volatility and disquiet could dissipate quickly and normal service will resume. But that’s not where we are now. The run-up to year-end will likely be a nervous time for markets.
Bankers tend to be optimists by nature; it goes with the territory. On cue, the four bankers on the IFR session said they had been pleasantly surprised by the pace of recovery and the financial state of their corporate clients. Following a year to 15 months of defensive action to ensure access to liquidity and protect balance sheets, German Mittelstand companies had paid back emergency facilities or cancelled undrawn loans from government support programmes.
They are turning their experiences of the public health and economic crisis to good use, taking the lessons of the crisis to think about the robustness of their business models, including their supply chains. While the Covid crisis is far from over, it has catalysed thinking about the future and accelerated discussions that had been in process before the pandemic.
In terms of the specifics of funding, competition continues to be intense in the loan and bond markets. Investment-grade and leveraged/high-yield markets have an abundance of liquidity, leading to some discussion about there being too much liquidity chasing too little demand, squeezing lending margins and fees back to pre-pandemic levels following a year where banks had made a better living.
There has been some evidence that companies have found better execution in a bond market heavily distorted by ECB bond-buying, so have transferred their loyalties from the loan market; loan bankers remain more vigilant around leverage and other factors than bond investors. That said several companies have approached the loan market with debut transactions to establish back-up facilities, figuring it was better to set up a facility and pay a commitment fee than sit on a pile of drawn cash earning negative interest.
Mittelstand companies have actively taken on ESG considerations, and while they lack the internal resources of Germany’s largest companies to fine-tune lender, investor and wider stakeholder requirements, they are diligently working on this aspect of the business. ESG features have moved on from ‘nice to have’ in Mittelstand Germany to become a core factor.
In terms of what’s coming up, that will depend on what happens with Covid. Next year will not see a refinancing wave in Germany. Companies that have yet to do maturity extensions to five years will extend when appropriate. Global M&A has broken all records but Germany hasn’t really been at the epicentre. The big hope expressed by all participants on the call was for more event-driven German activity.
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