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Crisis Talk — with Frank Czichowski of KfW

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By Toby Fildes
22 Apr 2020

In the first in a new series of crisis-time interviews with senior capital markets participants, GlobalCapital's Toby Fildes talks to Frank Czichowski, treasurer of Germany's KfW.

Czichowski is one of the most experienced and popular faces in the global capital markets, having been treasurer of the state-owned promotional bank since July 2004, a role in which he oversees liquidity management, funding, asset liability management, portfolio management and securitization. He is also responsible for the privatisation activities of equity stakes held by KfW. 

However, his life at KfW is about to come to an end — despite extreme turmoil in global markets he is due to step down as treasurer on schedule at the end of April, handing over to Tim Armbruster, head of treasury at Aareal Bank. Czichowski will leave KfW at the end of June.

In this interview, Czichowski discusses the corona crisis sweeping through the global economy, how his bank is playing a crucial role in Germany's response to it and what he'll miss most about the job, one of the most important and influential roles in the global capital markets.


The crisis and KfW's role in it

Have you ever known a crisis like this one? 

No, this is definitely the biggest crisis I’ve come across. We had the Great Financial Crisis and we were having to deal with a lot of things at the time, but it was, in the beginning at least, a crisis of the financial sector, and the financial sector had to solve it. 

This time, everybody is affected — every single individual, every single corporation, big or small. It has affected the demand side, the supply side, international relations, everything.

What is KfW doing to help?

The federal and state governments realised very quickly that this was a very deep crisis — a health crisis but also an economic one — and a whole package of measures were initiated. 

An important part of these measures in Germany is carried out by KfW. The principal idea is that KfW gives loans to large parts of the economy — from small companies of 10 people to big corporations — which face a liquidity crisis due to the Covid-19 pandemic. We do this in co-operation with the German banking sector but here the credit risk is, for 80% or 90%, depending on the type of loan, taken by the Federal Republic of Germany, and 10% or 20% by the on-lending banks. 

So these are collective efforts. Just recently we have announced another programme for medium-sized companies: an instant loan programme where the Federal Republic takes over 100% of the credit risk, with a fast-track approval process. 

Then the states themselves operate programmes for small enterprises. The majority are subsidies where you get a lump sum, depending on the size of your company, to get you over the next couple of weeks or months, so that you can pay your rent, your operating costs. 

Germany also reactivated an extensive short time working compensation scheme by the Federal Labour Office, where corporations can claim benefits if they temporarily cannot fully employ their workers. 

So there is a really comprehensive set of measures in Germany, catering for the many economic difficulties arising. KfW is the principal agency working on the loan programme for liquidity and investment purposes.

Do you have enough capacity to process all the requests for loans?

For the last couple of years we have worked on automating our processes with the banking sector. All the loans are first processed through the banking system and then forwarded to KfW. 

There are, of course, some large transactions which are individually handled, but the bulk are processed through automated systems and we have not seen any real difficulties.

In the beginning we had to increase our capacities, for instance in our call centres, quite significantly, to take care of all the requests. In the meantime, availability is very good. 

Reactions to the programmes have been quite positive both from the banking system and society at large.


You mentioned some of the bigger deals. For example, Adidas and Tui have disclosed that they have obtained loans from KfW. They look like the bespoke financing arrangements you mentioned, for companies with particularly acute challenges from Covid-19. I realise you can’t really talk about individual customers. But do you expect all sectors to apply for loans? Or will there be some more than others?

We have made rough estimates, but it’s too early to have general insight. The pipeline of requests amounts to nearly €28bn as of April 21 with more than 15,000 individual applications. Roughly 90% of the requests come from companies which have applied for less than €800,000. I’m not sure you can generalise by sector, but it is obvious that certain sectors, e.g. retail or tourism, are more affected than others — take utilities as an example. 


It’s obviously important to you that commercial lenders should lend alongside KfW.

Yes, this was the thrust of the structure. We think it’s important that the companies’ house banks do their credit work, because they have skin in the game. But the German government through KfW provides risk relief, because potentially the amount can get relatively big and therefore the house banks may not be able to cope with the additional loan volume. 


Crisis response and recovery

How do you expect your funding programme to change as a result of what’s going on? 

This is new territory insofar as there is a big uncertainty surrounding the question: how much demand will we ultimately have for the loans of the Covid-19-related programmes?

Funding is all about options, and we have broadened our options quite significantly. To start with, we have moderately increased the issuance under our CP programmes. Then, we — of course — rely on our long term funding through debt capital markets which we currently expect to reach €75bn in 2020.

In addition, the German government has established a facility to refinance us via the Wirtschaftsstabilisierungsfonds (WSF, or Economic Stabilisation Fund), a special fund managed by the German Finance Agency. We can obtain funding from the WSF up to an amount of €100bn which really broadens our financing options. 

If need be, we could also use KfW’s liquidity portfolio to refinance ourselves with the euro system. 

So given the many options we have, and scenarios that might play out, we have so far not adjusted our funding programme for the current year. As we have done in the past, we’ll review the funding programme in early July and will communicate the result.


How have KfW spreads reacted?

Initially spreads moved out quite significantly both vis-a-vis the swap curve and in relation to German governments bonds. Before the crisis, KfW was trading at five years at around swaps minus 10bp, maybe a little less. Then we were at swaps plus 15bp-16bp, so it moved 25bp. But now KfW securities have tightened in again.

We have seen a relatively volatile spread development. However, markets in general have coped quite well. I think there were perhaps two weeks in which not much happened. But after that both SSA and the corporate sectors picked up pace and oversubscribed books were more the norm than the exception. 


So how long do you think we can keep these emergency measures in place if there is a possibility of a protracted recession? 

We cannot be sure when the current lockdown will end, but current measures that are in place will no doubt be lifted only slowly and carefully. I’m certain that the economic impact will be felt long after the public lockdown is lifted. But in the meantime, our Covid-19 related lending programmes will be in place right up until the end of the year. 


And what’s your hunch on what will happen to the European economy?

I don’t have any better insights than other people. We’ve all seen the IMF marking down the worldwide growth rate from plus 3% to minus 3%. I think if we end that way, that would be a good outcome. Much will depend on the lockdowns — the sooner they are lifted the sooner we get back to some sort of growth, although I note that in recent days many countries have extended their lockdown periods or modified them only slightly.


The European Commission’s SURE scheme — its €100bn instrument to protect jobs — is presumably a good complement to the short time working compensation scheme you have in Germany. But one thing that has been more contentious in Germany and the Netherlands is the idea of Euro-bonds or Corona Bonds. Is that something that you favour?

I understand you couldn’t but ask me this question… Well, for the time being the most important issue is that people and corporations on the ground get assistance. The EU finance ministers’ agreement on a package of facilities is a very good step.

The question of common bonds is a fundamental question. There are a lot of different questions that need to be answered around it and the subject needs intensive discussion. I’m sure this discussion will be taken. 

In any case, because it needs such a lot of deliberations, it will take a long time to implement. So in the meantime, we need to concentrate on getting assistance to those affected by the corona crisis.

What about other countries’ responses? Which ones do you admire?

Some of the Asian countries have really done a good job in containing the virus — I read the numbers about Korea, about Taiwan, but I don’t know enough about it. 

Here in Germany I think we have seen very decisive action and so far have contained the crisis relatively well, both from a health perspective as well as from an economic perspective. 

In terms of countries’ financial responses it’s too early to tell and it’s really for a later stage to evaluate what was the most effective way to tackle the crisis. 

How far do you think we are through this economic crisis? 

Again, I’m afraid it’s too early to say, we have really only seen the beginning. Many areas are affected by this; we focus so much on what happens in the US, Europe, but in emerging markets there are substantial consequences, so I think this will go on for quite some time. 

I wouldn’t say that we are in a V-shaped recovery; at least I have difficulties envisioning this. We are in a longer process. Ultimately, we will get out of it, I’m pretty sure, but it will take us well into next year. 


Capital markets at home

Are you still working in the office?

Yes. In KfW’s financial markets team, we have about half the colleagues here and the other half working at home. Those working in the office spread out a little bit more and keep the physical distancing as required. We are doing conference calls all day long — nobody goes to a meeting any more. Of course, I can still see my colleagues from a distance, but when we speak, we do so over the phone most of the time. 

I find it works surprisingly well. I think we all had to get used to it, but somehow we have managed over time. What is more difficult is a free-wheeling discussion — you have to be more disciplined and focused on the subject. So the kind of discussion you would have over an after-work beer to explore new avenues is something which is perhaps missing.


How do you think debt capital markets have coped with people working from home?

I’m genuinely surprised that everything works so well. When you look at the issuance of our recent KfW benchmark bonds you don’t really see a difference. We had 150-200 investors, a syndicate of banks, we had to deal with hedging operations and so on. So there were really many people involved and it just worked. 

Most of our partners, both on the banks side and the investor side, were set up. 

At the beginning the market was slow but this was more for general market uncertainty reasons. We have not seen significant parts of the investor base breaking away.

Admittedly, the swap markets have been thinner and the bid-offer spreads have been a bit wider, but that is something you would expect in any crisis situation, not something which is special for this one. As I said, I think it has really worked well. 

You mentioned wide bid-offer spreads and bonds trading wider and so forth. Have you noticed any change in your investor base as a result?

No, our strongholds have always been banks because of the 0% risk weighting, and central banks because of the asset quality. We have not seen fundamental changes. In the beginning asset managers took a step back, but no, there’s really been no fundamental shift. 


Do you think this will all bring about a permanent change in the way we work — travelling less, spending fewer days in the office and perhaps making it more acceptable for banks to pitch for mandates over video or phone?

I think so, yes — there will be a shift. We have all got much more used to dealing with telephone conferences, video conferences and I’m sure that this will have a lasting effect.

First of all, the uncertainty around infection risk will most likely stay with us for some time. Even if we have the lockdown measures released a little bit and introduce some flexibility, there will be restrictions that continue and one of them will probably concern business travel. I would imagine most people will limit their international travel to the absolute minimum until a vaccine is available. 

In addition, working with telecommunication is pretty efficient. I would expect business travel to go down long term, not least because we need to continue and probably to intensify our work on sustainable finance. Travel is not the most important factor in greenhouse emissions, but it is a factor. 


Leaving KfW

You are due to step down as treasurer of KfW. Has the crisis changed your plans? 

I’m leaving the post of treasurer in a few days; April 30 is the final curtain here. I will still be with the bank for a couple of months and will leave KfW on June 30. So this is my last interview with GlobalCapital as the treasurer of KfW. 


What are your plans afterwards?

I will stay engaged in the financial sector. The Federal Government has proposed me as a member of the Supervisory Board of Commerzbank, which is due to be decided at the bank’s AGM in May.

What will you miss about the job?

First of all, I will miss a wonderful team at KfW’s treasury. I will miss the rest of my colleagues at this important financial institution. Also, working in capital markets has been fun — at least most of the time. When you work in the markets at a place like KfW it is a really interesting and satisfying mix of the bigger picture of global economic development and the more technical side of things. I really have enjoyed this combination.

There are a lot of very interesting people, not only at KfW, but also outside, and I think that is what I will miss in my daily business. 

But I am unlikely to miss the financial markets completely, so I hope to stay in touch with many colleagues and I will also look at GlobalCapital’s website once in a while!


What have been your top moments at KfW? 

First and foremost, KfW is a promotional bank. The most important task for us in treasury and capital markets is to enable the bank to fulfil its mission as a promotional bank for Germany and the developing countries.

KfW has grown in its importance in Germany over the last 25 years and we have enabled KfW to deliver its volumes and purpose, both domestically and internationally, in difficult times as well as in more normal times. 

KfW is now the third largest bank in Germany in terms of total assets, and while size of institution is not a purpose for us, it underlines our importance to the German and international economy. So I think that’s what drives everybody here, and that includes me.

Of course, there have been a lot of highlights in our work and the list is too long for this interview. We were the institution to really introduce benchmark bond programmes in Europe, back in 2001 and 2002. This was a huge success and enabled KfW to grow. Actually, we are now speaking 20 years later and KfW still works with this instrument. We did our first global bond in 1996 which was also a very important step.

Our first green bond was a big development, but actually we had worked on ESG issues many years before. We started in 2007 with signing the Principles for Responsible Investment and started to work on treasury operations that are in line with long-term sustainability goals. 

There have also been quite a number of very interesting equity capital market transactions. We did the biggest ever exchangeable bond at the time — in fact I think it’s still the biggest until this day — a €5bn bonds exchangeable into Deutsche Telekom.

By Toby Fildes
22 Apr 2020