July 2010 | ifr special report | 7 GERMAN CORPORATE FUNDING ROUNDTABLE
bank facilities are the centrepiece of the capital structure for corporates, and that’s going to Mathias Noack’s point: all of us have been talking to clients over the last few years and telling them to diversify their funding base, and I think that is what has happened.
Now when you look at large corporates, the percentage of capital markets funding has increased, which speaks to the level of retail interest. All the large and mid caps now have a much broader investor base that they can go to without formal hurdles, such as ratings etc, which were a must-have in the past. But all in all, I think the loan will remain.
I’m a little bit sceptical on the Basel 3 implications for the refinancing volumes coming through in 2010, 2011 and 2012, which are enormous. I don’t think there has been a year – I think 2007 saw a refinancing volume in the order of €700bn – which comes anywhere close to what’s coming due in the European loan markets over the next three years. And that’s in an environment where Basel 3 is contemplated everywhere and discussed. So I think that will drive up bond market volumes in Germany and Europe over the next few years.
Mathias Noack: Let me add to what Marc just said and to what Matthias said before. Yes we have been advocating that companies should look out for other funding opportunities and funding sources. But I think it’s also really important to mention that particularly in difficult times, there’s a relationship aspect and having the opportunity to speak to a handful of banks has proven to be extremely important. In the last 18 months particularly, the syndicated loan has been a crucial instrument to make sure that companies who have been negatively affected by the crisis can sail through it in a safe manner.
Richard Curtis: That is a key point. The recent example of BP illustrates the point. BP’s CDS spreads were around 500bp and there was talk they needed to raise money. The bond market would do it, but with an 8%, 9%, 10%-type coupon. The relationship banks were reportedly prepared to do a deal at a margin of 1% over. So I think the relationship on the loan side is always going to be stronger and when you need it the banks will be there. They will step up and do things that the bond market will just shudder at from a risk pricing perspective.
Keith Mullin, Editor-at-Large; IFR
For the bond market, it’s a moment in time. Where’s the price today? And that’s where the deal gets sold and the market doesn’t care about looking forward. The banking relationship is: “Where have we been? Where are we now? Where are we going and how flexible do we need to be?” I bet your bottom dollar that a lot of the companies that launched bonds at the end of 2008 and in 2009 at very high coupons wish those fundraisings were loans that they could call away as opposed to having to pay that 9% coupon for five years. That’s expensive. Yes the bond market was there, it gave them the money, they grabbed it because they could and they needed it, but act in haste repent at leisure. So the loan side definitely gives an edge of flexibility.
IFR: Thomas, isn’t the answer rather than being competitive funding tools, bonds and loans are complimentary. I’m curious to know also how the rela- tionship banking model has evolved out of the crisis.
Thomas Kull: I’m strongly convinced that the relationship model remains at the core of the relationships between banks and issuers. We saw that during the crisis. I don’t fully agree with Matthias’ view that the bank market is always reliable because we did have some fallout at the end of 2008 into the beginning of 2009. The syndicated loan market was very difficult at times, but bank financing didn’t go away; there were adjustments being made, such as club deals with even stronger rela-
tionship ties. This has proved to be very sustainable. The backbone of financing for German corporates will continue to be the relationship-driven lending market in the form of bilaterals, club deals and syndicated facilities. But we have structural changes so loans will constitute a smaller portion of overall funding needs, and a bigger portion will be funded in alternative markets like the bond market, the Schuldscheine market or using other more capital market-related instruments. But the syndicated loan market is a little bit divided at the moment. We talked earlier about Telefonica. I think well- known brands, good credits are able to raise money with attractive margins at longer tenors. However, for sub investment-grade companies or companies in difficult situations, credit is still a scarce resource and it’s difficult to get it even from relationship banks.
Mathias Noack: I don’t fully agree. It’s not scarcity value, it’s that both sides have to find a middle ground on where to price and how to structure deals. I don’t believe there has been a credit shortage; there have been more arguments along the lines of: “Why should I suddenly pay you a 2% margin if I have paid only 25bp in the past?” But in principle, banks were there for their relationships. Yes we have seen the investment banks falling away, and shutting down bilateral facilities but in principle there were other banks prepared to step in for the right price. So the market was there, the liquidity was there. It was more a question of finding a middle
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