KEITH MULLIN, KM CAPITAL MARKETS: MIKE, CAN YOU PICK UP ON THOSE OBSERVATIONS?
Mike Kapoor, Commerzbank: I think what is true for this entire relationship banking narrative is that the old story still holds true. And that is maybe one of the reasons we weren’t able to get margins for these clients up, even if times were difficult like last year. Reference rates increased significantly, but you basically didn’t see any changes in margins. One of the reasons for that is because most of the volumes we saw were in the form of undrawn revolving credit facilities, with very low margins and very low commitment fees. Those lines create very high shortfalls for the banks and, in return, banks will need more cross-selling.
From a client perspective, the more cross-selling you have to give, the better it is in terms of that client’s pricing power. I don’t think this is anything you will be able to change specifically in the German market; we have to deal with that.
On the other hand, what we observed in the smaller mid-cap loan market last year was that some syndicate banks really struggled with pricing and put a lot of pressure on clients to commit to a certain level of cross-sell or ultimately increase their margins. And in some cases, we actually saw some banks being replaced by others that were happy to step in. That isn’t the start of a trend but it does happen occasionally that you exchange banks.
KEITH MULLIN, KM CAPITAL MARKETS: I’M CURIOUS ABOUT THE COMPETITIVE ELEMENT HERE GIVEN THAT THE ECB LENDING SURVEYS HAVE TALKED ABOUT CREDIT DEMAND BEING LOW AT THE SAME TIME AS UNDERWRITING STANDARDS ARE TIGHTER. JOHANNES, CAN YOU TALK ABOUT THE COMPETITIVE ELEMENT WHEN IT COMES TO CORPORATE LENDING?
Johannes Eckardt, UniCredit: For the right transactions, we see fierce competition, as always. On the other hand, we have also seen some banks being less willing to provide capital. But I agree with what the others have said, that it’s often, if not always, also a cross-selling story. It’s more important than ever especially when raising new capital. We have seen a … well, I don’t know if we can call it a trend, but we have seen more syndications that included a tiering structure rather than just syndicating at one ticket level.
And that already explains – quite well in my view – what banks are looking at: they are more willing to take a loan portfolio management approach and allocate capital for the right transactions for the right price. They’re less willing to go into relationship lending when there is not a real and a profitable relationship path they can take. And that is maybe also a reason why we saw more underwritings in 2023 than we did in 2022, even for transactions that were refinancings of existing credit facilities.
However, we need to differentiate here between refinancings for investment-grade companies where we just refi the existing volumes of undrawn back-up liquidity revolving credit facilities. I agree that those were as aggressive as ever. During Covid, we didn’t really see price increases so that’s a very stable segment. But on the other hand, if clients requested to increase volume by two or even three times, this had a certain price effect and that was something we didn’t see much in the years before Covid.
I think here we can clearly see that banks are more cautious when it comes to buying into relationship stories. More than before, they want each and every deal to be profitable. If they’re not, they need ancillary business opportunities to a larger extent than before.
KEITH MULLIN, KM CAPITAL MARKETS: THERE WERE A LOT OF HEADLINES IN 2023 AS IN PREVIOUS YEARS ABOUT THE ENCROACHMENT OF PRIVATE CREDIT INTO MID-MARKET CORPORATE LENDING, AWAY FROM SPONSOR-DRIVEN FINANCINGS AND LEVERAGED BUYOUTS. HAVE YOU SEEN ANY BIG CHANGE IN THE ACTIVITIES OF DIRECT LENDERS IN CORE MITTELSTAND LENDING?
Frank Schehl, DZ Bank: I guess maybe a bit of a provocative answer. But no, we really don’t see them much in the segment where we are active in corporate syndicated lending. I absolutely agree, of course, we see them on the sponsor-driven side and on LBOs and so on but not really in the corporate deals that we’re active in. We haven’t really felt competition from that angle, to be totally honest.
Mike Kapoor, Commerzbank: The fact is that banks are not willing to climb further up the risk curve while private debt funds are not willing to sacrifice the returns they crave. In reality we almost never get together.
Harald Loh, ING: Maybe just to add here, and picking up also on the previous question, pressure on the capital side is obviously rising for banks and that might drive a case for non-bank investors to extend their activities. Have we seen anything like that yet? Certainly not. While I fully agree with what has been said, depending on further pressure on the capital side for banks, this might become an interesting market.
Johannes Eckardt, UniCredit: We’re not seeing it either. I have little to add; it’s really a non-issue. If you look at it on a broader scale, I agree that it might be something we might see more in the future but at the moment and also over the last few years, it’s not really something we see in investment-grade land or that much in non-investment-grade land either.
KEITH MULLIN, KM CAPITAL MARKETS: WHAT ARE THE KEY TAKEAWAYS IN TERMS OF ACTIVITY IN THE SCHULDSCHEIN MARKET IN 2023?
Johannes Eckardt, UniCredit: 2022 had been a record year. We saw a lot of borderline transactions go through ie, transactions that were not clear investment grade, not even crossover but were really non-investment grade. Some wondered at the time if Schuldschein was the right product for those deals, but they were placed in the market successfully.
2023 was a more difficult year and a run for quality was there again. Iit was a much less active year for the Schuldschein market in terms of volume and also number of deals than it was in 2022.
Thomas Wolff, LBBW: As Johannes said, 2022 was a record year. This was not repeated in 2023. Nevertheless, the market was pretty strong and we saw significant volumes. I’d say it’s like the bank market. There’s been a lack of borrower demand to some extent but the more significant reason has been the very strong bond market. Rated issuers were able to tap the bond market at very, very attractive terms –more attractive than in the Schuldschein market. The situation was different in 2022 when you had borrowers opportunistically moving between the bond and Schuldschein markets. That was not the case in 2023, where if you had a rating, you went to the bond market.
That said, the Schuldschein market is very strong. We didn’t see clients turning away from Schuldscheine to tap the bank market. The bank market sometimes has more attractive terms than the Schuldschein market but we didn’t see borrowers going to the loan market instead of the Schuldschein market just because of the 10bp–20bp differential.
Issuers are very focused on diversification of funding and on not consuming too much of their bank lines. They want to keep their powder dry for whatever lies ahead because the future is uncertain and they may need their core banks. That is why a lot of issuers are still tapping the Schuldschein market over the bank market, even though they pay slightly more. In summary, I would say the Schuldschein market is in good shape, below the record volume, clearly, but I’ve been pleased with that market.
Johannes Eckardt, UniCredit: Maybe just to add to what Thomas said, I agree with most of what you said. However, I don’t think that a loan, especially not an RCF, is a product a borrower would choose instead of a Schuldschein. You rather see both products being used. I agree that you would see a competitive situation between Schuldscheine and bonds but that’s also limited.
Thomas Wolff, LBBW: I was referring to term loans. We have all had those discussions: “am I going to do a term loan or a Schuldschein?” But as you said it’s not a competition because people choose the market for reasons other than price.
Harald Loh, ING: Just to add one point, where has issuance in the Schuldschein market actually come from? Whereas for German domestic issuance, we saw roughly a one-third drop in market activity, for international issuance the drop was over 50%. That was the main driver of lower activity in 2023 compared with the previous year. And coming on top of that, for reasons already mentioned, the accessibility of other financing markets and the overall issues that we have been talking about.
Mike Kapoor, Commerzbank: I want to flag that same point. I think you are absolutely right, but we did see an uptick of international issuers interested in the Schuldschein product towards the end of 2023. We saw the first French Schuldschein [from Groupe SEB]. We also saw a number of Austrian and Dutch transactions coming to market and we are quite optimistic that we will get more of the international issuers back to the table in 2024.
Harald Loh, ING: You mentioned the Benelux region and France, where overall we saw muted Schuldschein activity in 2023 but now it’s slowly but surely coming back.
KEITH MULLIN, KM CAPITAL MARKETS: I WANT TO BRING IN THE TOPIC OF SUSTAINABLE FINANCE. THOSE OF YOU WHO WERE ON LAST YEAR’S CALL MAY RECALL THAT WE TALKED ABOUT THE EARLY RUNNING IN TERMS OF SUSTAINABLE FINANCE HAD BEEN MADE BY LARGE COMPANIES AND MITTELSTAND HAD FOR ALL SORTS OF REASONS BEEN A BIT SLOWER TO FOCUS ON IT. ON THE MIDDLE AND UPPER SEGMENT OF GERMAN MITTELSTAND, DID YOU SEE ENGAGEMENT CONTINUE WITH THE SUSTAINABLE FINANCE AGENDA OVER THE COURSE OF 2023?
Frank Schehl, DZ Bank: Definitely. This topic would warrant a panel on its own but I guess to cut it short, the sustainability loan market has matured over the last few years. But definitely one thing is what you just mentioned, which is the size of the companies focusing on this topic is getting smaller. We’re moving from large-cap companies into the Mittelstand segment and these companies are also looking for sustainability-linked loans.
This may have to do with mandatory requirements like the Corporate Sustainability Reporting Directive, to which they are subject. [The first companies will have to apply the new rules for the first time in 2024 for reports published in 2025]. On the basis of internal and external pressures, companies have to focus on this topic. From there, it’s a pretty natural move to look to their bankers to have sustainability factors included in their financing options. Less sophisticated borrowers getting into this fast-growing market is definitely an element we see.
Another element, of course, in this maturing environment is that everyone is becoming more knowledgeable. And maybe just to throw in one thing that we also see: borrowers are moving more and more from a ratings-based approach to a KPI-based approach. We see many more transactions with sustainability KPIs.
That is probably down to several reasons. Some borrowers tell us they don’t like the ratings approach any more as ESG ratings are a bit of a black box and can change and they don’t know exactly why. From a lender’s perspective, it’s much clearer to define ambitious goals if they are KPI-based rather than ratings-based.
Johannes Eckardt, UniCredit: The market is getting much more mature and more professional and this has already led to KPIs being observed and examined more intensely by banks. On top of that, banks have their own KPIs, their own sustainability goals and this sometimes leads into sustainable financing portfolios with CO2 emissions being less and less financed as we approach 2030.
It will be interesting to see how this market develops and if it will lead to companies that are not sustainable in the view of the market having less access to capital and some banks, at least, [not being able to lend] because it would ultimately increase their CO2 loan portfolios. We have seen in the market that when companies transition into more sustainable companies, the credit appetite of banks is higher.
Thomas Wolff, LBBW: With the market getting more mature, which is absolutely the case and more professional and moving more to KPIs, we also see the difficulties and the challenges that can arise. We saw a couple of cases in 2023 where facility agreements had to be amended because KPIs were no longer reported in the same way. I think borrowers realise it’s no longer an easy exercise relative to what it was when this market first evolved. It’s a very sophisticated exercise. It needs an established sustainability team.
Companies need to be very clear on a multi-year horizon regarding which KPIs they are going to report. And we’ve seen issuers consider whether this is the right way to go, even issuers that have done a sustainability-linked loan. On the other hand, we had examples in 2023 of very prominent transactions coming to the market without a sustainability link. That market isn’t so straightforward any more.
Harald Loh, ING: We have seen cases like Thomas mentioned. To add to that, there isn’t a single deal that we’re talking to our clients about where sustainability isn’t a topic. Even if a company decides ultimately not to include a direct sustainability link, the questions are being asked during the process because it has become an inherent part of banks’ credit processes.
By directly adding a sustainability link – and indeed that’s more and more on a KPI basis – it then becomes a question of supporting the transaction process because banks are asking the questions anyway. In other words, the direct link in the documentation further substantiates the respective borrower’s sustainability ambitions.
Mike Kapoor, Commerzbank: There’s pressure from us as banks nowadays to get clients moving in that direction even if they are a little hesitant. When it comes to smaller companies, management has a lot of other topics on their plate and don’t have dedicated teams to look after ESG. We nevertheless encourage discussions around this important topic. When a client is not there yet, we try to already set up the mechanisms to have KPIs included in the documentation at some point in the future.
We may, instead of the 12-month recommendation from the Loan Market Association, increase that timeline to 24 or 36 months. But we are saying: “look, you have to get involved and you have to be prepared with this topic”. And they are starting to look at it. Of course, we have very sophisticated teams that have a lot of expertise in the area. We’ve learned from previous transactions and we can leverage that expertise and knowledge base. That’s a real advantage.
KEITH MULLIN, KM CAPITAL MARKETS: LET’S MOVE TO A BRIEF CONCLUSION AND LOOK AHEAD. BASED ON WHAT YOU KNOW TODAY AND BASED ON YOUR LENDING PORTFOLIOS AND BORROWER PROFILES, WHAT DO YOU THINK IS REASONABLE TO EXPECT IN TERMS OF ACTIVITY IN THE COMING YEAR?
Thomas Wolff, LBBW: At one level, we can expect more of the same. I think there will still be a very strong focus on credit because a lot of banks and investors think that 2024 could be a more difficult part of the credit cycle than 2023 was. There’s going to be an increased focus on credit. Other than that, we think 2024 has to be better from a funding activity level just because activity in 2023 was as low as it was. And there’s clearly a good pipeline in terms of potential transactions being looked at, mainly refinancings.
I think the pipeline looks good. Whether it materialises or not depends on a lot of factors but I’m looking positively into 2024. Specifically, on the event-driven side, companies are definitely interested in acquisitions but what it takes is low volatility and a high level of certainty around economic developments, something we lacked in 2023. If that returns, we will see more activity.
Johannes Eckardt, UniCredit: I think overall we’re looking at a good pipeline for the first quarter at least, maybe even for the first half of 2024. I would expect further event-driven transactions but I still don’t think that the market environment is changing materially so we will still have that differentiation between high investment-grade companies being able to achieve best-in-class pricing for backstop-type RCF facilities. On the other hand, new money for non-investment-grade companies or for companies looking for acquisition-related funds will come, but at a cost.
I don’t see that the refinancing pressure on banks will diminish or go away. It’s not a market environment where our clients can actually expect much of a downside trend in terms of pricing. Capital comes at a cost. But overall I’m optimistic for 2024. Besides all these challenges we are facing, the loan market is still a highly functioning market.
Frank Schehl, DZ Bank: Hard to add much to that. I can resonate with my colleagues that the pipeline definitely looks actually pretty good for the next few months. I think one of the most important things to point out was Johannes’ last sentence: the syndicated loan market is really a highly functioning market. That’s the most important message for borrowers. Even through the crisis that we’ve all experienced over the last five years, the market has been functioning. For us, it would be nice if volumes picked up.
There are a few arguments as to why it should pick up, for example, more event-driven activity coming back in 2024. Also I think some borrowers maybe pushed out their refinancings because they wanted to see where margins went.
Harald Loh, ING: I’m also more optimistic about 2024 than pessimistic. We’re certainly looking at a nice pipeline across the markets. There’s a high overall level of uncertainty, especially at a geopolitical level but it looks as if the market has become used to that. I’m wondering what kind of geopolitical event needs to take place to change that. Are we going to see that in 2024? I hope not. If that isn’t the case, I think we’re going to look at a pretty good market and year.
Ideally, we will see more on the event-driven side, and certainly more on the key sectoral themes that I mentioned earlier, especially as far as energy and digitalisation are concerned.
Mike Kapoor, Commerzbank: We’re looking at a healthy pipeline. I don’t think we are going to see mega-mergers in Germany but I think mid-cap clients will take advantage of opportunities if they can agree with sellers on pricing. That’s very important. What we learned in the last couple of months is that it’s not always easy. I hope the interest rate environment is going to change. It looks quite good and you can see what the stock market has already been doing. That’s positive.
On the other hand, the IFO Institute’s business survey of early December, which interviewed 5,000 companies, concluded that most German companies had significantly reduced their investment plans for 2024. That’s slightly concerning. However, these surveys always come with a lag so I hope that sentiment will change for the better. I am optimistic that it’s definitely going to be a better year than last year.
KEITH MULLIN, KM CAPITAL MARKETS: LET’S FINISH ON AN UP NOTE. THANK YOU SO MUCH FOR PARTICIPATING IN THIS SESSION. LET’S HOPE 2024 TURNS OUT TO BE A STELLAR YEAR.
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