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4 | ifr special report | July 2010 GERMAN CORPORATE FUNDING ROUNDTABLE

German DCM — borrower type H1 2010

31% 39% 2009

corporates, but are hesitant to go into Spanish or Italian corporates, which means demand from the buy side for German corporates is extremely high, especially with a weaker euro which as we’ve been saying will help German exporters.

47% 22% Total = US$245,149m Sovereign/agency Source: Thomson Reuters

was available elsewhere so we saw tremendous issuance in 2009 in the bond market. Corporates grabbed liquidity, cut spending and rebuilt their balance sheets at the same time as European governments destroyed theirs. So now you’ve got a juxtaposed position. You could argue now that perhaps the big blue chip corporates – the national champions – are the risk-free rate and the sovereigns are the poor relations.

Spain recently did a 10-year at 195bp over mid-swaps. Where should Telefonica print? Historically Telefonica has always priced above Spain. Is Telefonica a better risk than the sovereign? And if it is, should it price inside the sovereign? It’s not quite the same in Germany because Germany has had the fight to quality and Bunds are at historically very low levels. But the point here is that the whole relationship between corporates and sovereigns is probably changing. I believe the average investor today will probably prefer a solid corporate to a less solid government. In terms of who’s buying, one of the interesting things we’ve seen in 2009 (it’s slowed down a bit in 2010) is the German retail investor who has come in and bought bonds in a huge way, either from their Sparkassen, through the exchanges, or through banking intermedi- aries. This has driven bond performance. You can see the difference between deals that have a €1,000 denomination and deals that have a €50,000 denomination. This whole concept of doing retail targeted deals and getting the secondary performance was a strong story for 2009 and still is (to a lesser extent) in 2010.

As a retail German investor, do you stick it in the stock market and wonder: “Am I going to get a 5%, 10% return a year? Am I going to get a lot of volatility?” Or are they going to buy bonds from the likes of BMW, Deutsche Telekom, Merck, Bayer, BASF or Adidas and clip a 5% coupon for five years knowing they’re going to get 25% over five years and performance is going to be a straight line?

Marc Mueller: I think the sheer mass of demand coming from the retail market was the crucial development in the bond market in 2009. In the past, these investors looked more to the equity side. They now see corporate bonds as a safe bet. They made 10%, 15% on some of these bonds throughout 2009. That will not come back, but I think reinvesting in the same asset class will persist and grow. This to some extent decouples the sovereign risk issue from the German corporate market, because interest in German corporates is not highly correlated to sovereign develop- ments. That is a good sign for German corporates.

Olaf Sarges, UniCredit: I absolutely agree and would even go further. In my opinion, German corporates are profiting from developments in the general market. There has been a move out of peripheral government bonds to the safe havens of France to a certain extent but mainly into Germany. There is a lot of cash liquidity in the market that needs to be invested somewhere. The ABS market is not yet back on track, you still have problems in the financial sector. Many investors want to buy

Financials 15%

Total = US$466,772m Corporates


Low interest rates not only help the Bund fund at very attractive levels – and in my opinion we will have low rates for the next couple of years – they also offer German corporates very attractive funding. Prior to the crisis, spreads had gone down to really stupid levels. Then you had a short period of time, which Richard mentioned, at end of 2008 after Lehman, where coupons,of 8%–9% were paid in some cases even in the investment-grade area. The market came back quite quickly in 2009. We’re not yet printing again at very low levels. But funding is historically extremely cheap for corporates.

IFR: A lot of the conversation seems to point to an ongoing process of bank disintermediation. There seems to be a very strong case for companies to issue bonds as opposed taking out bank loans. Bettina, with the banking system still deleveraging – albeit with individual banks at different points of the deleveraging cycle – is disintermediation a growing trend in Germany?

Bettina Streiter, DZ Bank: I think there is a trend but I think bonds and loans will continue to coexist. Through 2008 and 2009, corporates discovered that they have several routes to market and can choose. They can look at the bond market, which at times can beat loan pricing, (depending on credit quality and other issues) and for some, it’s the first step to reaching a broader spectrum of investors. Disintermediation will certainly be a trend going forward. We will probably see another cycle of banks tightening lending terms and conditions, so the bond market seems to be more reliable for a lot of corporates, at least at this point of time. We saw in the first half of the year that you can get longer tenors of seven years and upwards and this has been much more popular than the first half of 2009, where we started with one to three years for top-quality names. So the market has opened in a very broad way in terms of tenors available, in terms of the spectrum of ratings that can come to the market. We’ve seen a huge volume so far

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