Mid-sized German banks are starting to offer high-yield underwriting capabilities to domestic Mittelstand corporates, encroaching on an area that until now has been dominated by multi-national banking giants. Last week, Westdeutsche Landesbank and HypoVereinsbank were joint leads on Gildemeister's €175 million seven-year 9.75% issue. It was the first European deal in which no investment bank with a well-established high-yield platform was included in the syndicate.
Mark Dodd, head of WestLB's syndicate in London, said Gildemeister's bonds were placed with 95 clients in 13 countries. He emphasized that only 30% of the deal had been placed in Germany, with another 30% picked up by high-yield investors in the U.K. "Everybody was wrong in assuming we would place the deal purely in Germany," said Dodd, referring to doubts voiced in the market regarding the banks' distribution capabilities outside the domestic retail market. He added WestLB had been approached recently by investment banks wanting to partner on future deals.
The advantage that German banks have over their competitors in underwriting high-yield deals for German SMEs is that they have been providing loan financing for almost half a century and therefore have strong relationships with the issuers, Dodd noted.
Other market professionals, however, point out that provision of liquidity for the bonds is critical, and the current German banks might not be in a position to ensure this. Jim Amine, head of leveraged finance at Credit Suisse First Boston in London, said only CSFB, Deutsche Bank, and J.P. Morgan Securities have maintained a commitment to high-yield through the ups and downs and he expects this commitment will continue to win them mandates. "Issuers typically choose an underwriter with the most high-yield expertise to get the best coupon, and investors want an underwriter with dedicated high yield research analysts and traders to provide consistent aftermarket support," said Amine.
"Investors have concerns over who is going to make a market in the bonds and the long-term existence of some of the players in the German market is in question given the likelihood of consolidation," added a high-yield official at Deutsche Bank in London.
