IFR’s German Mittelstand Financing Roundtable took place in early October, long before market sentiment had soured somewhat in the face of government and market reactions to rising infection rates and the emergence of the new variant of Covid-19. The basic thrust of the comments stands but the comments that follow should be read taking into account the timing.
KEITH MULLIN, KM CAPITAL MARKETS: WELCOME TO THIS IFR VIDEO CALL ON GERMAN MITTELSTAND FINANCING. WE’RE FOCUSING TODAY ON COMPANIES AT THE UPPER END OF THE MITTELSTAND SEGMENT, THOSE WITH GOOD ACCESS TO THE ARRAY OF CAPITAL MARKET INSTRUMENTS. WE’LL GO ON TO DISCUSS THE STATE OF PLAY AFTER 18 MONTHS OF THE PANDEMIC, BUT TO SET UP OUR CONVERSATION, I THINK IT WOULD BE GOOD TO START WITH A BRIEF DISCUSSION ABOUT THE STATE OF THE GERMAN ECONOMY. THOMAS, COULD YOU TO GIVE US A GENERAL FLAVOUR OF WHERE WE ARE IN THE ECONOMIC RECOVERY? THE PACE OF RECOVERY HAS PERHAPS BEEN SLOWER THAN MANY OBSERVERS HAD EXPECTED THIS YEAR AND WE ARE STARTING TO SEE A MATERIAL INCREASE IN INFECTION RATES ACROSS EUROPE SO WE’RE DEFINITELY NOT THROUGH THE PANDEMIC PHASE, BUT HOW DOES IT FEEL OUT THERE?
Thomas Wolff, BNP Paribas: Overall, we have been surprised by the speed of recovery on a corporate level. I think most companies are in a far better state than they had expected to be maybe 12 or even six months ago. But it is obviously a mixed picture and the story is different across industries. I am not sure there will be many long-term effects but we have yet to see what the medium-term effects will be.
We have clearly seen some supply chain issues around semiconductors and other products, and some inflationary impacts when it comes to raw material prices and some pressure for corporates to pass on higher prices to their customers. There are some challenges yet to come and certain industries are still struggling, like travel and retail. But I would say that as of now, overall, we have been positively surprised.
Dominik Müller, Commerzbank: The tone of your question was a little bit pessimistic but I very much share Thomas’s view. I see a lot of companies that have managed the process very well. At the beginning of the Covid crisis, there was a completely new situation for companies and banks. The measures and reactions we saw were very clear and effective. Securing liquidity was key and many companies did this by approaching their banks. And they got the support they needed from core relationship banks as well as from the support programmes of KfW and other institutions. Within a comparatively short period of time, programmes were established and financing was successfully put in place.
But even more surprisingly, these facilities – particularly the KfW transactions – were to a large extent cancelled after a short period as most of them were left undrawn. This doesn’t mean that each and every company has come through the crisis a winner, that’s for sure. Specific industries, as Thomas mentioned, have been more affected than others. But on the other hand, change and adaptation towards a new environment has been really actively and successfully driven by many companies. Some still might have challenges but most of them have vigorously designed processes to exit the crisis even in a better shape than before.
KEITH MULLIN, KM CAPITAL MARKETS: IN TERMS OF THE TONE OF MY QUESTIONS, JOURNALISTS TEND TO HAVE A GLASS-HALF-EMPTY APPROACH TO LIFE.
Dominik Müller, Commerzbank: It seems that bankers tend to have a glass-half-full approach!
KEITH MULLIN, KM CAPITAL MARKETS: ULRICH, IF THE KEY WORDS IN 2020 AND INTO 2021 WERE ACCESS TO LIQUIDITY AND PROTECTING THE BALANCE SHEET IN THE WAKE OF A VERY SUDDEN AND SERIOUS SITUATION. WHAT KIND OF WORDS WOULD YOU USE, IF YOU FAST FORWARD TO TODAY, TO DESCRIBE HOW COMPANIES ARE APPROACHING FINANCING?
Ulrich Kittmann, DZ Bank: I was really critical last year [about the way things proceeded] but I’m happy today that the reasons for my criticisms weren’t realised. Why was that? Because German finance minister Olaf Scholz brought out his bazooka, handing out a huge amount of money – €100bn – to German households through the government’s Überbrückungshilfe and Kurzarbeitergeld schemes. The first was bridge financing for businesses to cover the loss of revenues during lockdown; the second was allowances paid to employees on short-time working to make up for loss of earnings.
With this bazooka, the intention to prevent real trouble from our clients was realised. If during the global financial crisis governments rescued the banks, this time they rescued the banks’ clients: the companies. Two things didn’t happen, where I was critical last year: on the lending supply side we didn’t have to increase our loan-loss provisions and there was a limited impact on our core equity ratios. And on the credit demand side, the negative impact on our clients’ ratings wasn’t as bad as expected. Bringing these effects together, Germany’s bazooka policy means we are almost back to where we were before the crisis.
Clients were able to repay KfW rescue loans early; the ECB also played a role with its easy money and TLTRO. All in all, the loan market is very resilient. As taxpayers, people will have their own views about whether government support was good or bad but as a banker, it is good for our clients. And what is good for our clients is good for us.
KEITH MULLIN, KM CAPITAL MARKETS: SEBASTIAN, I AM INTERESTED IN THE SUPPLY AND DEMAND DYNAMIC AROUND CAPITAL. AT A GENERAL LEVEL, ARE LARGE MITTELSTAND GERMAN CORPORATES NOW LOOKING TO BORROW TO FINANCE GROWTH, TO FINANCE ACQUISITIONS? HOW WOULD YOU CHARACTERISE THEIR MINDSET?
Sebastian Wittkopp, LBBW: There’s a lot of liquidity in the market; banks have more liquidity than ever: bank balance sheets have grown by more than 20%. But companies have no demand for that liquidity. On one hand, when you pitch to clients, they say they have no external growth to finance or no need for acquisition debt at the moment. On the other, clients, especially those with investment-grade ratings, tell us it has become easier and easier to print a benchmark bond, partly because the ECB is buying a lot of bonds. It’s not so easy for the banks, which are under pressure to invest the money but nobody wants it.
Thomas Wolff, BNP Paribas: I am not quite as negative. There was a brief window last year where margins and fees went up and the banks made a good living. Margin and fee-wise, we are back to where we were at the low levels we had at the end of 2019 and the beginning of 2020; with tenors too, we are pretty much where we started.
The pressure is on for banks to make money and earn the shortfall, which comes out of relationship-defining transactions. That pressure exists but there is probably a slightly better discipline in the market today, more from the borrowers to reduce or redefine bank groups. There absolutely has been over-supply; to that extent, I agree. If a bank wants to step out of a relationship, two or three more are waiting to take their place. Borrowers have no issue replacing lenders. It’s generally borrowers saying they have one or two banks too many so if there is one willing to leave, they’d be happy to accommodate that.
One thing we have seen as a result of Covid is more debut transactions. Borrowers that didn’t have a syndicated loan have realised it is favourable to have one in place as a back-up. And given interest rates are still heavily negative, it is cheaper in most instances to pay a commitment fee on a backstop facility rather than sit on a huge pile of cash at negative 50bp interest.
A lot of these corporates have also said they want to have a documentation standard in place. If you have a syndicated loan, no matter how big or small, you have agreed documentation with your banks that you can use for acquisitions, other event-driven transactions or for liquidity purposes.
There is a bit more demand in terms of backstop facilities and companies are tending to increase them. We had a reasonable run on M&A in the first half although probably not quite at the level we had hoped. That is probably the big question: what will happen with M&A activity. Corporates are eager and are looking at situations but valuations are high. Deals have to work out and make sense. That is the key question: to what extent will event-driven deals occur.
Ulrich Kittmann, DZ Bank: The crucial question is this: is the cake big enough to feed all these hungry animals running around and hunting the same clients. The German banking market is still overbanked. There are too many players with too much liquidity. We have a lot of huge Mittelstand companies but not enough to absorb the abundant liquidity, as Sebastian mentioned. I doubt that the cake is big enough, or there are too many hungry animals. So where is this going to end? What we can see: longer tenors and pricing at the levels before the crisis.
KEITH MULLIN, KM CAPITAL MARKETS: DOMINIK, WHAT ABOUT COMPETITION BETWEEN CAPITAL MARKETS? IT’S NOT JUST BANKS COMPETING TO LEND, YOU ALSO HAVE INSTITUTIONAL INVESTORS LOOKING FOR CORPORATE EXPOSURE THROUGH THE BOND MARKET AS WELL AS SMALLER MARKETS LIKE SCHULDSCHEIN OR US PRIVATE PLACEMENTS. THIS ISN’T NEW OF COURSE BUT HOW HAS THIS ASPECT DEVELOPED THIS YEAR?
Dominik Müller, Commerzbank: Competition between market segments was intense in the past, it continues to be intense, and will most likely continue to be so in the future, as Ulrich and Thomas have said. The variety and magnitude of products is not new and has not changed; the composition and use of these products over time might change. Two or three years ago, one of the most demanded products was Schuldscheine. This year so far, Schuldscheine have played a less important role, with only moderate activity.
The product generally has not changed but the circumstances under which it is used might differ, for example because of an updated ECB policy and the prevailing TLTRO programme. Therefore the preferred source of drawn funds has temporarily changed; it will change again and this will have an impact again on several other instruments and markets, as you mentioned, for example the Schuldschein market, the USPP market and others.
KEITH MULLIN, KM CAPITAL MARKETS: SEBASTIAN, DID I SEE YOU DISAGREEING?
Sebastian Wittkopp, LBBW: Yes. With regard to Schuldscheine, we do see activity in the market. The problem is borrowers say they don’t need to tap the market because they can get money from their banks with easier terms and conditions. On the documentation front, a senior facility agreement is between 100–200 pages, Schuldschein documentation is 20–40 pages. For a bilateral loan, it’s even easier, maybe 10 pages.
A lot of Mittelstand borrowers are going for bilateral loans. Another factor here is Mittelstand companies might say they need money but only for a very short time, maybe one year or less, so it is perfect for banks. That is why the Schuldschein market is not as strong as in previous years but it is still healthy. At the moment, there are a lot of new SSD issues in the market or were placed at the beginning of Q4.
Dominik Müller, Commerzbank: I agree with you; there’s no contradiction. It is just a temporary effect as I said. The banks are willing to grant money under favourable conditions but at the end of the day when the ECB programmes come to an end, the situation will change again and specific market segments will once again become more attractive than others.
KEITH MULLIN, KM CAPITAL MARKETS: ONE OF THE THINGS THAT IS FRONT OF MIND ON A GLOBAL BASIS IS THE EXTENT AND PACE AT WHICH CENTRAL BANKS WITHDRAW STIMULUS. WHEN THE ECB DOES START TO WITHDRAW STIMULUS, WILL THAT CREATE PROBLEMS FOR COMPANIES, PARTICULARLY IN SECTORS THAT HAVE STRUGGLED THROUGH COVID, AS WELL AS SO-CALLED ZOMBIE COMPANIES?
Ulrich Kittmann, DZ Bank: I think the ECB is trapped. On one hand, they know they have to taper but on the other they know that if they increase interest rates some of the southern European countries could get into serious trouble. My expectation is that they will disregard higher inflation and that we will not see significant tapering or a significant increase in interest rates.
There is, of course, as you mentioned, the issue of zombie companies that would suffer if interest rates rise. But I don’t expect this because as I said, the ECB is trapped. And by the way, inflation rate is not being triggered by high volumes of money circulating in the economy at high velocity; it is triggered by the material increases in oil and gas and transportation prices and by the lack of availability of workers in certain sectors.
Thomas Wolff, BNP Paribas: I fully agree. I don’t think tapering will come soon. Also when it comes to zombie companies, I don’t think there is a big risk in Germany in terms of direct effects. There may be some indirect effects: cheap money puts pressure on banks and may have loosened minimum credit standards here or there. But I don’t think when we talk about German corporates that there is a big risk of zombies being uncovered as a result of tapering.
To see the digital version of this report, please click here
To purchase printed copies or a PDF of this report, please email email@example.com