12 | ifr special report | July 2010 GERMAN CORPORATE FUNDING ROUNDTABLE
Bund Futures Performance: Jan 1 2010 to Jul 23 2010 130
128 126 124 122 120 Jan 2010 Source: Eurex
need yield. We have a situation where Europe is basically in difficulties, but yields are low. It doesn’t make sense. You’ve got challenging credits out there complaining about the yields they’re paying but they’re low compared to the last 20 years. We’re in a cycle. I agree with Olaf that rates aren’t going anywhere certainly for six months, maybe a year, but they will pick up. One day issuers are going to say: “I could have got 4% for 12 years (in the case of Deutsche Telecom)”. And you’re going to turn around and say: “I can’t go wrong if I’m buying money at 4% or below for 15 years”. That has to be a good decision over that cycle. Maybe not tomorrow or in six months but in two, three, five years’ time they’ll be sitting there going, “Brilliant”.
IFR: I’d like to touch briefly on prospects for M&A. On paper, they look very promising. There’s a lot of cash in the banking sector, a lot of cash in the corporate sector and good funding opportunities yet there’s very low levels of M&A activity. Japanese corporates are saying they’re looking to Europe to buy companies, and there’s evidence that the cash sitting in US money market funds not knowing what to do next is going to come to Europe to buy corporates. Does the group have any views on M&A into 2011, 2012? Asset prices are still relatively low so presumably there is some good deal flow potential.
Johannes Heinloth: I had this discussion the other day with a corporate client and I came up with a similar argument. I said: “Look, asset prices are pretty low”. And he said: “You’re wrong. They’re pretty expensive”. That’s the point: it depends on which angle you’re viewing
it from. There’s a huge amount of disagreement around the right price. And secondly, there’s a huge amount of uncertainty with regard to this double dip scenario and about the huge amount of volatility in the market. Few people will dare to borrow a huge amount of money to finance a big acquisition at the moment.
Marc Mueller: I would mirror the uncertainty point to some extent but I’m very positive that 2011 will see higher volumes. We’ve seen a couple of trades being announced or contemplated this year, but it’s not the volume that we used to see on a permanent basis. There’s a lot of volatility and uncertainty that makes any decision a lot more complicated today than it was two or three years ago. Volumes have been muted due to the crisis but they will come back.
Johannes Heinloth: Don’t forget that we are just a couple of months out of one of the biggest financial crises ever, so I think the mindset in many companies is still very uncertain and still very much focused around security and protecting what is there rather than on growth scenarios and opportunities going forward. But it’s really a question of time and it will come. I think we just need to wait a little more before the mindset changes again.
Matthias Gaab: Activity will probably start with the best credits and then trickle down. In the current environment the argument will probably be at least from my perspective that there was hardly a time when it was more beneficial to have a good rating as opposed to a meagre rating. Back in 2006, 2007 there was a fairly minimal stretch differential between Triple B, Single A and a Double A minus
Feb Mar Apr May Jun Jul
whereas today there’s a huge gap between them. So in conjunction with the uncertainty around forthcoming economic developments, people are concerned about preserving their credit quality over time even in the weaker scenario.
Johannes Heinloth: With regard to the cash position of companies, I think there is a question whether on a net basis corporates are really awash with cash. There is still a huge amount of debt sitting on balance sheets, but even if they’re hoarding cash, they’re keeping it for a rainy day. Whether this cash will be used to buy back shares, repay debt or make acquisitions remains to be seen.
In the meantime, we are advising our clients to tap the market now, to think about low asset prices and the interesting funding spreads that Richard mentioned because everyone would probably agree that interest rates will go up significantly in the medium term, so therefore if you can lock in interesting margins and spreads now, it certainly will help you through the next three to five years.
Mathias Noack: The majority of my corporate clients don’t have access to the capital markets so there are plenty of deals for us to do on the syndicated loans side. I guess at some point the question might arise as to whether we on the bank side, will start competing with investors on the debt capital markets side, because banks need funded assets. I think the Telefonica deal, as we mentioned, is a very aggressive- ly priced term loan. On the other hand, we need funded assets from top-quality credits. Would we rather take on this kind of credit risk or not do anything and just provide unfunded backstop facilities? For the time being, funding spreads are still an issue but I think also over time these will stabilise and then banks will start competing with DCM investors for funded assets.
Thomas Kull: Unfortunately for some of us [on the origination side], issuers have the right approach to current market conditions saying: “I’m not just raising money because it’s cheap. I want to tap the market because I need the funding”. Corporate borrowers bear the cost of carry if they just hold it on their balance sheet so are not just grabbing the opportunity and locking in money because they can get it.
IFR: Ladies and gentlemen: that’s a good a place as any to bring our discussion to close. Thank you for your comments.
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