KEITH MULLIN, KM CAPITAL MARKETS: WELCOME TO IFR’S GERMANY MITTELSTAND FINANCING ROUNDTABLE. LET’S START WITH A REVIEW OF ACTIVITY IN 2023. WE’LL GET INTO SOME MARKET NUANCES AS WE GO ALONG AND END WITH SOME THOUGHTS ABOUT THE YEAR AHEAD. MIKE, CAN YOU KICK US OFF?
Mike Kapoor, Commerzbank: All in all, last year was quite a disappointing one. We were expecting more market activity. Global activity levels were down 15%, close to historic lows since the global financial crisis, although EMEA did a little better. Activity was still muted, though. If you look at the constituents behind those volumes, there were a lot of refinancings, just as there were in 2022. We didn’t expect that to be one of the major drivers as clients already had sufficient liquidity lines in place.
If you look at event-driven activity, it was really disappointing. We hoped that there would be more than in 2022 but it didn’t materialise for different reasons: geopolitical, the interest rate environment, recession fears, etc.
Then if you look at smaller debut transactions for mid-cap clients without access to capital markets, we also didn’t see a lot of that either. That was the most surprising element because you would have thought that in an environment with such unstable conditions, clients would have wanted to switch from bilateral lending into syndicated finance to secure medium-term debt.
If you look at what happened when new clients approached banks during the pandemic, when we had to tell them: “no, we cannot look after you at the moment, we’re focused on our existing syndicated loan clients”, there is a lot of potential now for those clients to come to us, maybe in 2024.
KEITH MULLIN, KM CAPITAL MARKETS: THOMAS, DO YOU AGREE WITH MIKE? WHAT DO YOU PUT THE LACK OF ACTIVITY DOWN TO? LACK OF CREDIT DEMAND? BANKS TIGHTENING UNDERWRITING STANDARDS? CAN YOU PUT YOUR FINGER ON IT?
Thomas Wolff, LBBW: First of all, I have to agree with Mike; it was a disappointing year but it was clearly not lender-driven. Lending appetite from the market has been very significant. Banks are well capitalised, they have done their homework, and we’re not hearing at all about RWA limitations. Banks are obviously concerned about where we are in the credit cycle and are worried about profitability but there are no constraints in terms of capital available, so the reduction in activity clearly came from the borrower side.
On the refinancing side, we no longer have decreasing margins so clients don’t have strong incentives to engage in early refinancing. On the contrary, borrowers approaching the market, certainly at the end of 2023 and into 2024, are potentially facing higher costs. We have seen some M&A but not enough, although the slight increase in recent interest makes us hopeful.
As for debut transactions, again there were some but volumes were too small to have any significant impact on the stats.
Frank Schehl, DZ Bank: I agree it was disappointing to a certain extent. On the event-driven side, as Thomas pointed out, there were a few transactions, like Schaeffler-Vitesco, Silver Lake-Software AG, Zeppelin Group-CP ApS. That’s why when you look at the overall stats, Germany fared a little better than some of its peers in Europe.
And because of the inflationary environment, several clients came to us needing more working capital lines so we had a bit of deal flow from that side, especially on the agricultural side where volumes increased. In that respect it was like 2022 when we saw companies in the energy sector looking for bigger lines.
We also saw several clients moving from bilateral facilities to syndicated loans, but as has already been pointed out, those didn’t add up to huge volumes. We’re talking here about mid-cap companies that have never approached the syndicated loan market. They’re pretty work-intensive so they keep the team busy but these clients don’t really go for huge size.
KEITH MULLIN, KM CAPITAL MARKETS: JOHANNES, CAN YOU FOLLOW UP WITH YOUR THOUGHTS? AND CAN YOU COMMENT ON THIS ISSUE OF CLIENTS SWITCHING FROM BILATERAL OR EVEN SMALL CLUB FACILITIES TO BROADER SYNDICATED FACILITIES? WHAT ARE THE BENEFITS?
Johannes Eckardt, UniCredit: First of all, I fully agree with what all the others have said but I disagree with regard to the first half of 2023, when we actually saw an increase in volumes in Germany at least, driven by transactions like RWE [a €5bn revolving credit facility]. But yes, looking at 2023 as a whole, we are down both in volume and number of deals in Germany.
But activity has compared quite well to the whole of EMEA, as Frank pointed out, where we were down by a lot more and EMEA had already witnessed a decline in volumes in the first half of last year. I would say Germany actually stands out. Liquidity facilities in the utilities sector were a major driver, with new lines as well as refinancings pushing volumes up. And that’s why in total, as we neared the end of 2023, Germany’s EMEA market share rose from 12% to nearly 16%.
But overall, it was a disappointing year and we could have done a lot more. And the absence of refinancing activity and event-driven transactions were the major drivers but that’s understandable, bearing in mind the geopolitical environment and changing interest-rate environment. This has pushed up the cost of capital for banks, which has gone into margins, which also went up. It was not an ideal market environment. Generally speaking, banks could not offer comparable or even more attractive fees and margins to their clients compared to what they already had.
On the second question, some of the major drivers for companies to go into a syndicated loan are better financing security and more certainty of funds compared to a number of bilateral facility agreements. The majority lenders consent mechanism can also be a driver. And it’s easier to raise larger volumes in an efficient way more quickly in a syndicated facility than speaking to each and every bank separately. And last but not least, it’s also a good instrument to define your relationship with banks and to treat them equally.
Harald Loh, ING: In general, I fully agree with what has already been said. In addition to that, I think it’s also interesting to see where the decline in 2023 came from. On the volume side, it was mainly driven by the big international companies refraining from tapping the market.
In addition, we saw a significant drop in activity for smaller syndicated loans, which are usually not only contributing to the overall market volume but are especially important for the overall number of deals, that is, the overall deal flow we see in the market. To a certain extent, the driving force for this was German Mittelstand in 2023. Uncertainty was a key factor behind less market activity seen across the corporate space throughout 2023.
KEITH MULLIN, KM CAPITAL MARKETS: ONE OF THE MAJOR TALKING POINTS OF 2023 WAS THE IMPACT OF RISING RATES AND THE TIMING OF THE EASING CYCLE. HOW HAVE HIGHER RATES EMBEDDED THEMSELVES INTO MARKET MENTALITY? HAVE THEY CAUSED MANY PROBLEMS? HAVE YOU SEEN COMPANIES STRUGGLING TO GET REFINANCED OR STRUGGLING WITH HIGHER TERMS? WHAT ARE THE BANKS DOING TO MITIGATE SOME OF THE IMPACTS OF HIGHER RATES ON BORROWERS? FRANK, CAN YOU KICK US OFF ON THIS ONE?
Frank Schehl, DZ Bank: I think probably there are two things to distinguish. One is whether higher rates really have an impact on borrowers’ behaviour in terms of would they refi earlier or later. On that point, I think there’s little impact because obviously all the loans have variable interest rates so companies are paying higher rates on their existing loans as much as they would on a new loan and there’s no incentive to do something more quickly or slowly. That’s different to when margins rise. And that’s what we saw in 2023: margins went up so there was little incentive to refi quickly.
But then, higher interest rates of course have a huge impact on every borrower’s business. And that was why we saw fewer term loans or loans for investments. These were held back for all the classic reasons. There’s less investment activity because at higher interest rates, investments are less lucrative. There’s less event-driven financing because it’s more difficult to make events worth your while at higher interest rates. And then, of course, you have several clients where the interest bill really has an impact on their credit standing.
I think these are things that we saw in 2023, in particular, clients that are more highly leveraged. They are clearly feeling the effect of these higher interest rates. I think it’s quite interesting that probably over the last, let’s say, four or five years [when rates were very low], we didn’t think so much about debt leverage, which can have a huge impact on cashflow. It was more like: “OK you’re highly leveraged and that’s it”. But that’s what we saw for much of 2023.
KEITH MULLIN, KM CAPITAL MARKETS: MIKE: HAVE YOU HAD TO DEAL WITH BORROWERS WHO HAVE HAD DIFFICULTIES MAINTAINING THEIR INTEREST COVENANTS? HAVE YOU HAD TO REVIEW AND PERHAPS REWORK COVENANTS FOR BORROWERS THAT ARE LEVERAGED TO THE POINT WHERE THE HIGHER RATES ARE AFFECTING THEIR ABILITY TO FUNCTION OPERATIONALLY?
Mike Kapoor, Commerzbank: In the corporate loan space, not so much. Of course, there have been difficult issues arising in this context but we didn’t see it on a large scale. It’s fair to say that what we finance are robust businesses, normally with very good credit ratings. That’s maybe a big advantage of the German economy, where we have a lot of corporates that have good ratings with solid credit metrics. That might be different in other countries in Europe.
For that reason, companies are strong in understanding the market and reacting. I mean it’s very important that they come to us first when they encounter any difficulties. But in these very rare circumstances, we have almost always found a good solution for clients.
KEITH MULLIN, KM CAPITAL MARKETS: JOHANNES, SOME SECTORS HAVE COME UP AGAINST REAL PROBLEMS. COMMERCIAL REAL ESTATE HAS BEEN ONE. DID YOU TAKE A MORE SECTOR-SPECIFIC LASER-LIKE FOCUS IN 2023 IN TERMS OF MAKING SURE THAT YOU WERE ON THE RIGHT SIDE OF TROUBLE?
Johannes Eckardt, UniCredit: Yes, definitely. Some sectors have, as you say, gotten into trouble. We generally try to do the best for all our clients and that includes those that may currently be experiencing difficulties. But most market activity wasn’t in real estate and even less in automotive. The big driver in 2023 was energy and utilities and the energy trading sector, which came to the market with a number of transactions. The sectors that were actually in need of liquidity received the liquidity they sought.
I agree with what Thomas said, that we didn’t really see a credit crunch or anything like that but we did see margins and fees going up. However, for the right price, we saw good liquidity available in the market across all sectors. But we definitely also saw transactions in the real estate sector that were challenging for sure.
KEITH MULLIN, KM CAPITAL MARKETS: HARALD, CAN YOU PICK UP ON THIS SECTOR APPROACH, LOOKING AT IT PARTICULARLY AS A FOREIGN BANK, ALBEIT ONE WITH A TRACK RECORD IN GERMANY. DID HEAD OFFICE ASK YOU TO BE MORE CAUTIOUS IN 2023?
Harald Loh, ING: Regarding our approach in the German market, we tend to be rather cautious anyway, so for our German corporate credit portfolio I’m not concerned at all. It is very well managed. On the broader theme of what have we seen across the sectors, on one hand some sectors have experienced considerable pressure, for example on the commercial real estate side. On the other hand, key sector themes remain very much intact.
Transformations are ongoing in quite a lot of sectors, starting with the energy transition, which will require multiple billions of financings in the years to come and which has already started. That key trend is intact. Another key trend is on digitalisation, which is continuing and is also going to require a lot of capital.
Specifically for Germany, high energy-intensive sectors are a big question mark. What’s going to happen there? On the chemicals side, for example, we haven’t seen too much activity in that sector but the transition theme will continue. And I think these key sectoral themes are something that are going to remain in the upcoming years.
KEITH MULLIN, KM CAPITAL MARKETS: THOMAS, OVER THE COURSE OF 2023, ONE OF THE BIG TALKING POINTS WAS THE FACT THAT BANKS WERE SLOW TO PASS ON HIGHER RATES TO DEPOSITORS, WHEREAS THEY WERE VERY QUICK TO PASS ON HIGHER RATES TO BORROWERS. IN THE CORPORATE SPHERE, HAS LOAN PRICING BUILT IN A SAFETY BUFFER JUST IN CASE THERE ARE CREDIT TROUBLES DOWN THE ROAD? IN OTHER WORDS, HAVE MARGINS INCREASED PERHAPS MORE THAN UNDERLYING RATES MIGHT IMPLY?
Thomas Wolff, LBBW: Unfortunately, they haven’t risen as much as we would have liked. We’ve already talked about interest rates. When interest rates rise, so, generally, do margins. This has been pretty apparent in the bond market. When rates are at 50bp, you obviously want a certain margin for the risk but that is smaller than if interest rates are at 4%. We’ve seen it in the bond market, we’ve seen it to an extent in the Schuldschein market and the loan market, but I would say the margin increase has not happened across the board.
At the top end of the spectrum, the very strong investment-grade names can probably still borrow money at pre-pandemic levels so nothing has happened there. The further you go down the credit spectrum, the higher the increase in margins is. This clearly shows one thing: that competitive pressures in the market are still very much intact and functioning. Banks obviously benefit from rising interest rates, as you can see from the P&Ls, but I think for a lot of the business we do, we are far from having a significant increase in pricing power now than we were, unfortunately.
Frank Schehl, DZ Bank: I couldn’t agree more. What we saw is exactly what Thomas pointed out: that on the risk curve, the lower you go, the higher the margins become hence the increase that we’ve seen over the last 12 months. There are probably two other things that we saw in 2023 and I’m curious as to whether my colleagues made this observation as well. We felt that the differential between rated and unrated companies also became a bit bigger.
There are companies, in particular in the large-cap sector, that have exactly the same profile as others but which are simply not rated. They had to face an increase in their margins whereas on the rated spectrum it’s really as Thomas says: literally pre-pandemic. Nothing has happened; it’s all the same.
Another thing we observed is several cases where the spread between a revolver and a term loan was actually larger than you would normally expect, in particular in cases where the borrower had a Schuldschein as well. Then, of course, you look at the Schuldschein and feel the term loan shouldn’t be too far away from the Schuldschein pricing because the two have similar profiles in that it’s drawn money. But revolvers were sometimes priced quite a bit lower because that feeds into a different story. There is probably more of a relationship, cross-sell story behind it. These are two observations we’ve made over the last 12 months that maybe we hadn’t made to the same extent in the years before.
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