IFR’s 2023 German Mittelstand Financing video call took place following what participants described as a disappointing year in terms of activity in the syndicated loan market, which continues to be a key funding source for mid-cap companies.
There were a lot of refinancings, just as there had been in 2022, but speakers hadn’t expected that to be such a major driver as clients had sufficient liquidity lines in place and because margins had risen. Given that loan facilities are floating-rate, borrowers had already felt the impact of higher rates on existing facilities but higher margins put better economics out of reach.
One speaker said that margins didn’t rise as much the market would have liked, offering some food for thought for the coming year.
Because of the higher rate environment, speakers reported fewer term loans or loans for investment as break-even on new projects is harder to achieve and borrowers are reticent. Speakers also expressed little surprise that event-driven transactions undershot expectations in the face of a tough geopolitical backdrop, slow growth expectations and, again, the higher rate environment.
Some speakers reported some deal flow from clients needing to rework working capital lines in the face of the inflationary environment, and liquidity facilities for companies in the utilities and energy sectors. But Mittelstand companies that might have been expected to have graduated from bilateral facilities to debut transactions in the syndicated market failed to appear. This remains one of the market’s potential growth areas for 2024.
Speakers were at pains to point out that the paucity of activity was not driven by lenders. Banks are well capitalised and, contrary to market talk, lending appetite for the right situations remains significant and competition is fierce. Activity levels were driven more by a lack of client demand.
The differential between rated and unrated companies increased, as did the spread between revolvers and term loans, largely due to the cross-sell relationship orientation of the former. Undrawn revolving credit facilities carry very low margins and commitment fees, which create revenue shortfalls for lending banks, which raises cross-sell demands. From a client perspective, cross-selling drives pricing power.
For smaller mid-cap clients, some syndicate banks struggled on pricing and put a lot of pressure on clients to commit to a certain level of cross-selling as an alternative to increasing margins. In some cases, banks exited relationships, to be replaced by new lenders.
The Schuldschein market was unable to keep up with the record volumes of 2022 but activity last year involved better quality issuers. Volumes were also reduced by rated borrowers finding better execution in the bond market. By contrast, borrowers tended not to look to the loan market, even when it offered better marginal pricing. That was partially because issuers were reluctant to consume too much of their bank capacity because of the uncertain future where they might need their core banks. The return of international companies is another source of potential market growth in 2024.
Speakers expressed optimism about activity in 2024, partly because 2023 was so quiet. All spoke of good pipelines building around refinancing and event-driven transactions, where there is interest among corporates but whether these crystalise will depend on low volatility and better economic certainty. On pricing, solid investment-grade companies will achieve best-in-class pricing for backstop-type facilities but new money for non-investment-grade companies or for companies seeking acquisition-related funds is likely to come at a cost.
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