July 2010 | ifr special report | 9 GERMAN CORPORATE FUNDING ROUNDTABLE
whereas in 2009 there was some issuance and in 2008 there was huge issuance. The combination of activity picking up in the loan market, maybe an increase in CP volumes (for frequent issuers) and the low interest-rate environment is enabling unrated companies and high-yield issuers, to come to the market. The demand on the investor side is definitely there, and since the supply from many [rated] issuers that have been active in 2009 and early 2010 is drying up, the market needs to go in this direction.
IFR: Bettina, let’s talk a little about the notion of unrated, less well known or lower-rated issuers. The expectation this year in Europe is around €35bn in high-yield issuance across Europe in euros. What challenges do unrated or sub investment-grade companies throw up? There’s certainly a lot of credit work required on the investor side. Is this kind of issuance realisti- cally going fill the gap left by the big utilities and the big prime corporates in Germany?
Bettina Streiter: Yes and no. I think specific investors will dig into high-yield and do their credit work; others, because they know the name and the dynamics of a certain issuer, will partly step into high-yield bonds as we saw with the Conti bond3. We had a lot of questions on our desk from retail investors about the bond regardless of the denomina- tions of 50K. A lot of different investor bases are looking at higher-yielding assets because there are few alternatives available and high-grade borrowers will probably be sidelined for the rest of the year; you will see some, but not as much.
And we will see a lot of people who focus on absolute coupons looking at BASF or Linde for less than 2% or Conti at 8.5%. You will see a certain dynamic of even people who don’t do the professional credit work but will look more and more into high- yield or unrated.
There’s one big advantage in Germany which is this big domestic investor base, whether it’s retail or professional. We have a very large base and with the crisis we have suffered over the last couple of years, we are seeing a phenomenon of nationali- sation where you will see people buying national credits rather than going overseas. As a German investor, you might buy Telefonica because you know what they do, but you won’t buy another high-
Bettina Streiter, DZ Bank; Richard Curtis, WestLB
yield name in Spain but you certainly would in Germany.
Olaf Sarges: Some of the market’s broader dividing lines that were in place until 2007 have, in my opinion, faded away. If you went back to 2007 and asked investors or your sales people about sub-benchmark size, unrated or high-yield, they would have said no. Either people didn’t buy it, or it was a completely different investor base. Today, people don’t necessarily baulk at buying crossover names. For good double B names or unrated credits, you may see some funds walk away, but many are staying in, and sub-benchmark size seems to be no problem for many of them. There are funds who want to trade the index and who want to have €500m size but many of them are fading away. The split we had in the past, where investors needed to
Top 10 German high-yield bonds 1/1/2009–24/7/2010
Issue date 17/11/2009 14/10/2009 9/7/2010 15/1/2009 22/6/2010 9/7/2010 9/7/2010
13/10/2009 13/1/2010 2/7/2010
Source: Thomson Reuters
3In mid-July, Conti-Gummi Finance, rated B1/B, sold a €750m 144A/RegS senior secured deal due 2015, callable after three years. The deal priced with an 8.75% yield, for a 716bp pick- up over Bunds.
(US$m equiv) 3,871.6
HeidelbergCement 3,646.7 Conti Gummi Finance Fresenius US Finance II Heidelberg Finance Oxea Finance & CY Phoenix PIB Finance Hella KGaA Hueck & Co FMC Finance VI SA Nordenia Holdings
938.6 801.4 793.0 639.2 632.1 443.4 357.7 347.5
Currency € € €
US$ € € € € € €
Maturity 1/12/2017 31/10/2014 15/7/2015 15/7/2015 15/12/2015 15/7/2017 15/7/2014 20/10/2014 15/7/2016 15/7/2017
see Triple B flat, and where even with a negative outlook it was difficult because they needed to sell it if it went down by two notches; or where investors needed to have coupon step-up language or whatever; all that has faded., so I think the borderlines in the investor universe have to a certain extent, faded away during this crisis.
Richard Curtis: And that’s a function of what’s happened to the rating agencies as well. Investors are doing a lot more of their own work and not relying on what the rating agencies say. Now people are saying: “I know the name. I know the credit, I like what they do. They’re in a non-cyclical sector, I can walk out on the street and see them and feel comfortable”. One of the advantages of the bond market is that issuers whose credit quality depends on the investor’s opinion can get away with low
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