The debt origination bankers participating in IFR’s German Corporate Funding Roundtable in Frankfurt on July 13 were a confident bunch, but they find themselves in an odd position. Large German corporates and utilities have been absent from the debt capital markets in 2010, having been active fundraisers at the back end of 2008 and through 2009. At the same time, loan market activity has been muted, as banks rework their banking relationships and rethink their approach to lending.
On the other side of the equation, cash-rich investors are keen to put money to work and are actively chasing opportunities to gain exposure to German corporates, even more so in light of the country’s flight-to-quality status from sovereign debt-induced volatility.
German retail investors have re-emerged as a major driving force in the bond market. In parallel with this, the nationalisation of buying patterns has created enhanced demand for German paper, as the country’s large domestic investor base stays close to home to avoid credit problems in other parts of Europe. Adding to Germany’s allure, there are expectations that the country’s cost-competitive export-sector - benefiting from the weaker euro - will lead Europe out of its economic slump.
For the time being, the bond market is the market of choice for German corporates, particularly in an environment where disintermediation shows little sign of reversing. In the medium term, though, banks will come back into the frame and will compete more fulsomely for corporate funding.
One line of thinking is that companies with capital markets access will use the bond market for their funding requirements, and use banks for unfunded back-up lines only. Companies that don’t have access to capital markets - Mittelstand companies - will continue to rely on bank loans; mid-cap companies also have access to the Schuldscheine market, which is an attractive option for retail lenders who have been squeezed out of the syndications market.
The absence of prime corporates from the bank and capital markets, combined with strong investor appetite, has given, mid-cap, unrated and sub investment-grade borrowers a rare opportunity to steal the bond market limelight. Over €20bn of supply has emerged from such companies so far this year as traditional market segmentation fades away and investors become comfortable with new names.
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