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German Corporate Funding Solutions

22 Nov 2010

For evidence of the strength of investor demand to the German corporate sector look no further than the spectacularly successful Schuldscheindarlehen issue from Stadtwerke München (SMW) in May. Planned as a Eu250m transaction, the Bavarian utility’s deal generated orders of Eu1.7bn. Although this demand was unprecedented, SWM’s Eu750m deal was still a long way short of the record Eu1.35bn BMW raised in April 2008.

With corporate borrowers in Europe’s largest economy almost spoiled for choice by demand from investors and lenders in the bond, Schuldschein and syndicated loan markets, participants at last month’s Euroweek/BayernLB roundtable gathered together to discuss the various funding options available to German corporates.

Participants in the roundtable, which took place at BayernLB’s headquarters in Munich, were:

Narciso Quijano, fixed income portfolio manager, BayernInvest, MunichRaphael Krebl, debt capital markets origination, BayernLB, MunichPaul Kuhn, head of DCM origination, corporate, BayernLB, MunichMatthias Krampert, head of finance department, N-ERGIE, NürnbergJens Otto, Managing director, E.ON International Finance, VenloHans-Peter Rupprecht, corporate treasurer, Siemens, MunichDietmar Schubert, senior credit analyst, corporate loans, Allianz Investment Management SE, MunichDr Jörg Senger, head of capital markets,BayernLB, MunichFranz Steer, head of tresury, Stadtwerke München (SWM), MunichMaurizio Trenti, vice president, treasury operations, SES, LuxembourgDr Harald Wimmer, assistant general manager, Sumitomo Mitsui Banking Corporation, DüsseldorfModerator: Phil Moore, contributing editor, EuroWeek 

EUROWEEK: Jörg, please give us an introduction to the topic we’ll be discussing today. Jörg Senger, BayernLB: At BayernLB we have arranged a lot of Schuldscheine and corporate bond transactions over the past few years. In the last couple of years Schuldscheine have increased in popularity among investors. Starting with the BMW Eu1.35bn transaction which we led in 2008, which was a tremendous success, we have also seen deals such as the Siemens Eu1.1bn transaction and a number of others.

These transactions have all been in close competition with corporate bonds, with investors increasingly prepared to invest not just in Schuldscheine but also in bonds. We’ve seen a similar trend in 2010, illustrated by the highly successful Stadtwerke München transaction. This was a Eu750m trade with an order book of Eu1.7bn, which was the largest order book we have ever seen in the Schuldschein market. If you define a benchmark bond as an issue of Eu500m plus, this clearly showed that the Schuldschein market is able to compete with the corporate bond market in terms of the volumes borrowers can raise.

EUROWEEK: Paul, can you give us an overview of the funding alternatives available to German corporate borrowers, and to other borrowers eager to tap into the German investor base? Paul Kuhn, BayernLB: There are plenty of alternatives, depending on the borrower’s circumstances and objectives.

For a relatively small corporate looking to target the public market for the first time, it is important to recognise that compared with a Schuldschein transaction, a corporate bond transaction will be a very public exercise involving many future requirements. A Schuldschein issue is usually a much more controlled process in terms of the preparation and sale.

But a Schuldschein transaction can require up to four weeks of preparation including the issue of a credit profile before you begin marketing which can take another four to five weeks. When you’re talking about issuing a corporate bond through the public market you prepare your documentation perhaps once a year which you can then use more or less any time, which allows you to issue at very short notice. Windows of issuance in the corporate bond market can typically be accessed in a maximum of five days.

A second very important consideration for borrowers is market conditions at the time of issuance. In 2008 there was a severe shortage of liquidity in the public market, but the Schuldschein market remained very liquid. Investors became very aware of the advantages Schuldscheine offered, such as the fact that there is no mark-to-market requirement. That was the main driver for many top-end issuers to tap the Schuldschein market in 2008.

Having said that, now there is much more equilibrium between the two markets, with plenty of liquidity in both.

EUROWEEK: Did the Schuldschein market even remain open and liquid at the height of the crisis?Kuhn, BayernLB: The market remained very liquid after the Lehman collapse. However, investors became much more picky and looked into each credit in much greater detail.

So although it may take longer to come to market, the Schuldschein market is a more dependable source of funding because it’s always open.

Perhaps the corporates could tell us how they view the advantages and disadvantages of Schuldscheine relative to corporate bonds. Let’s start with Siemens, which has issued Schuldscheine recently as well as straight and hybrid bonds.

Hans-Peter Rupprecht, Siemens: The Schuldschein market has in theory always been available as a source of funding. But for some time it has been quite an old-fashioned instrument which in my really only came back into the picture recently.

We used the Schuldschein for the first time in 2008, when the market became fashionable again. We view the Schuldschein as an additional instrument rather than a core one, because of the volumes that the market can offer.

First-time borrowers with a credit quality similar to ours approaching the Schuldschein market can expect to raise between Eu750m-Eu1bn. In the case of Siemens we could expect the volume to be slightly higher which was the case in 2008 when we raised Eu1.1bn.

We approached the Schuldschein market pre-Lehman, but by the time we were working on our transaction we were already in the first phase of the financial crisis. By then we had seen quite an impact on credit spreads. So at that time the advantage of the Schuldschein market was that you could raise funding by paying a slightly lower credit margin compared to the bond market. The main reason for this is that investors don’t need to mark their Schuldschein holdings to market.

So for us it is a complementary instrument in the toolbox but it is definitely not an instrument that could form the basis for our entire refinancing requirement.

EUROWEEK: You mentioned price. Obviously it depends on market conditions, but how does pricing in the Schuldschein market compare with the corporate bond market?Rupprecht, Siemens: That is a very difficult question, because it depends entirely on market circumstances at the time. But we would certainly not expect to pay more for a Schuldschein issue than we would in the corporate bond market. EUROWEEK: The volumes that borrowers are extracting from the Schuldschein market seem to disprove the view sometimes expressed in the media outside Germany that the market is mainly for smaller companies looking to raise Eu100m-Eu200m. How surprised was Stadtwerke München at the size of the order book for its recent transaction? Franz Steer, SWM: It was a very great surprise to us. We expected to generate demand of more than the Eu250m which we indicated was the minimum size we were looking for. Perhaps we expected demand of Eu500m.

This was our first step into the capital market, because historically all our investments have been financed from free cashflow. The main reason for issuing in the Schuldschein market was to diversify away from bank lenders.

We still use old German GAAP accounting standards, that we don’t want to change, which was another reason why we went to the Schuldschein market rather than the corporate bond market.

The transaction was a very big success and the size of the order book created a pleasant problem in terms of allocation.

EUROWEEK: You’ve mentioned diversification away from your bank lenders. But isn’t it also the case that your recent transaction also gave you some very healthy international diversification, with demand from investors in markets such as Japan, Italy, the UK and others?Steer, SWM: When we were preparing this transaction, we discussed with our bankers where we would like to see diversification of our investor base. So we appointed two MLAs [mandated lead arrangers] with two different approaches: one was focused mainly on the German market and the other was more internationally-oriented.Senger, BayernLB: The key here is investor diversification. Most issuers over the last two years have been looking for diversification, either in bonds or in Schuldscheine and in some cases in both. Since the Lehman collapse it has been very important for issuers to base their funding needs on demand both from Schuldschein investors without the need to mark to market, as well as from bond investors.

This is crucial not just for issuers who prefer to do Schuldscheine for accounting reasons but also for large Dax-30 companies. They should be looking to generate demand from both sets of investors, and what we have seen in recent months is that even in the case of unrated bonds, there is a crossover between Schuldschein investors and bond investors.

EUROWEEK: Does that create price tension between the two sets of investors? Senger, BayernLB: I don’t think it’s a pricing issue. It is more a question of expanding your investor universe. Rupprecht, Siemens: I don’t think an issuer would consider doing a bond and a Schuldschein at the same time. From a practical perspective that would not be possible in any case because a Schuldschein takes more time.

We had a completely different investor circuit when we were preparing our Schuldschein. It was subscribed mainly by Sparkassen, and although some of these savings banks may have bought our bonds in the past, the Schuldschein issue was tailor-made for them. We had demand from some foreign banks and insurance companies but the main driver of the transaction was demand from Sparkassen, with some tickets as small as Eu2m or Eu3m.

Another important difference between the two instruments is flexibility. We responded to investor demand by issuing two tranches in five and seven years, and investors were also able to choose between fixed and floating rate notes in each tranche. You can’t normally do that with a bond.

EUROWEEK: In response to this strong demand, have borrowers been tempted to increase the size of their deals even more? Presumably Stadtwerke München had a finite requirement when it closed its transaction at Eu750m?Steer, SWM: In our liquidity planning we started out looking for Eu250m. We took Eu750m because it gave us the opportunity to issue 13 fixed or floating tranches across a range of maturities going out to 20 years. As we’re making long term investments in renewable energy projects it made sense for us to increase the size of the longer dated tranches. EUROWEEK: E.On is another borrower that has made use of a range of different funding instruments in recent years in several currencies. What does E.On see as the relative benefits of Schuldscheine and corporate bonds? Jens Otto, E.On: I would echo what Mr Rupprecht said. For us, Schuldcheine have been a means of diversifying our funding. When we began our current financing programme in October 2007 we knew that in the coming two to three years we would have to raise between Eu25bn-Eu30bn. When you have such a large funding requirement in front of you, you know that you are going to have to look at the widest range of funding sources. That is why we went into many different currencies but also into a range of different instruments.

As well as benchmark-sized bonds we also went into the 144A market in the US and of course the Schuldschein market. To put the scale of our funding programme in perspective, we did roughly 70 transactions in 23 months, of which about 10 were Schuldscheindarlehen. They varied in size from the largest transaction, which was Eu650m, to small, opportunistic trades of Eu70m-Eu80m. Tenor-wise, they ranged mainly from five to 10 years.

So for us Schuldscheine are a very good way of diversifying our investor base, because what we’ve seen from the order books, there is very little overlap between investors in our Schuldscheine and our benchmark bonds. That is why Schuldscheine are so effective in enlarging the group of investors you can attract.

EUROWEEK: Are those Schuldschein investors principally domestic savings banks and insurance companies, or have you detected an increase in demand from overseas investors?Otto, E.On: They have primarily been domestic savings banks and insurance companies.Maurizio Trenti, SES: Our primary sources of funding are public markets such as the euro capital market and the US 144A market, which we may use in the future. It has always been our strategy to broaden our investor group, as we have showed in various ways. For instance, in 2001 we issued the largest non-domestic US private placement of about $1bn.

We see the Schuldschein market as a very important complementary market. It helps us to tailor-make our debt maturity profile by allowing us to add tranches of Eu100m or Eu200m. It also allows us to reach a new group of buy and hold investors that we can’t normally access.

EUROWEEK: What has been the funding strategy at N-ERGIE, which has a smaller funding requirement than the other borrowers around the table?Matthias Krampert, N-ERGIE: To understand our funding strategy you need to know a bit about N-ERGIE’s historical background. N-ERGIE had very low leverage before 2009, when we launched a share transaction which was one of the biggest in our history.

As a first step in the capital market we did a syndicated loan via nine banks, with BayernLB acting as mandated lead arranger. As a second step we wanted to diversify our lenders, so we decided to issue a Schuldscheindarlehen in August 2010. Having seen how well the deal from Stadtwerke München had gone, we thought there would also be a good opportunity for us in the market.

As an unrated borrower we could have issued a bond, but that did not fit with our strategy. We originally planned to raise Eu150m. But the Schuldschein market offered us a very good spread because we came to the market during the financial crisis. This allowed us to take more out of the Schuldschein market than we had planned, issuing Eu385m, of which only Eu70m was for new financing. We used the remaining Eu315m to refinance our syndicated loan.

EUROWEEK: Was your issuance also across a wide range of maturities?Krampert, N-ERGIE: Yes. We issued in maturities of five, seven, 10 and 15 years. EUROWEEK: Does N-ERGIE plan to get a rating?Krampert, N-ERGIE: No. We have no plans to issue any capital market instrument that would require us to be rated. We believe that the Schuldschein serves a similar purpose to an unrated bond and fits our refinancing strategy perfectly. EUROWEEK: This is a good time to bring investors into the discussion. How influential are ratings in your investment decision in the Schuldschein market? Dietmar Schubert, Allianz: We have seen a number of unrated issuers come to the market recently, but from our side a rating is very helpful and important. Because if the issuer has an investment grade rating from one of the top three agencies and has the right documentation, with full negative pledge and a pari passu clause, it qualifies automatically for our cover fund and therefore makes the investment decision much easier. If there is no rating, as is the case with Stadtwerke München and N-ERGIE, to qualify for our cover fund the borrower needs to commit to a number of financial covenants. That was not the case with Stadtwerke München or N-ERGIE, so neither was eligible for our cover fund.Dr Harald Wimmer, SMBC: I work in the corporate banking department where public ratings aren’t so important because we perform our own internal ratings analysis. Therefore we are happy to invest in issuers without public ratings.EUROWEEK: Will you ask for extra basis points to compensate for the lack of a rating? Wimmer, SMBC: No. It does not normally influence our expectations on pricing at all. We do our own rating, and of course we compare pricing levels in the bond, CDS and syndicated loan markets. But we calculate our risk/return requirements based on our own systems. Narciso Quijano, BayernInvest: For us as fund managers we would urge issuers to have a rating because we have a lot of funds where we have strict investment criteria dictating that we are not able to invest in unrated bonds.

When I’ve discussed this with issuers they have told me that they believe they should command a better rating than they would get from the ratings agencies.

Additionally, as we are not buy-and-hold investors, if we take relative value into account we would also demand a higher spread for an unrated issuer because issues are less liquid for unrated borrowers than they are for rated issuers.

So I can understand why borrowers are reluctant to be rated by three rating agencies. I think two is enough and I recognise that some agencies are better than others. But ratings actions are usually a good signal that things are going wrong. And not all investors have the time or resources to make a deep assessment of the credits. So for investors that don’t have the resources to do their own research, ratings agencies can always provide more information than the issuers themselves.

Schubert, Allianz: We always make our own assessment. Regardless of whether Siemens or Stadtwerke München have a rating, every time a borrower issues a Schuldschein we have to make our own rating. This is a very important. We need time to make this rating, which may take two or three days, during which time we have to do a thorough analysis of the issuer, its guarantor, and the group, and without doing this it’s not possible for us to invest. It doesn’t matter if it’s Siemens, BMW or any other company — our board needs to see this analysis. So I find it hard to believe that there are some investors out there who don’t do their own assessment. Quijano, BayernInvest: All investors will do their initial assessment but to follow the credit is much more difficult. Otto, E.On: For a frequent issuer a rating is a prerequisite to generate the funding volumes that I mentioned. The market would never give us those volumes if we didn’t have a rating. Senger, BayernLB: For an originator an important consideration is the sort of business you’re in. For a utility like Stadtwerke München or N-Energie, it is easier to go to the Schuldschein or bond market without a rating because of their stable business model and the granularity and predictability of their revenue streams.

Manufacturing companies might not find it so easy to take Eu750m out of the Schuldschein market without any rating. I also fully agree with Jens that if you want to be a frequent issuer in any market you need a rating.

But coming back to the strategies of the borrowers around the tab, we’ve often seen SES in the bond market but not in the Schuldschein market. So does SES have a preference for one instrument over the other.

Trenti, SES:We issued two Schuldchein tranches of Eu100m in 2008. But coming from Luxembourg we are viewed as a foreign borrower. That means brand recognition is very important, which is why we use the Astra brand, which is well known in Germany, when we issue Schuldscheine.

A rating is less important for Schuldscheine than in corporate bonds where it is a must for borrowers accessing the market on a regularly. A Schuldschein issue takes between three and four weeks, since investors have to do their credit analysis and get credit approval. Name recognition among investors is therefore more important than ratings.

Like Siemens, we use the public bond market for our main funding, and the Schuldschein market is a useful add-on.

Raphael Krebl, BayernLB: The easiest option for investors is to have a rating, but they do their own credit assessment anyway. Frequent borrowers need ratings, but for issuers coming to the market for the first time, it is sufficient to issue without one. Nevertheless, it is definitely supportive for an unrated inaugural issuer to have a well-known business model, a brand name, and/or proven stable cash flows.EUROWEEK: Moving on, the other main issue in the Schuldschein market is liquidity. Is liquidity completely irrelevant to a buy-and-hold investor like Allianz?Schubert, Allianz: We are a very active investor in the bond market. But my department is responsible solely for Schuldscheindarlehen, and to us liquidity is not important because we’re buy-and-hold investors. We have no banking business so we tend to approach banks or issuers and tell them we want to make a deal with them, and we agree that there will be no contact between us and the borrower from the start of the loan to its maturity.

Our aim is solely to receive our interest payments and to be repaid our principle on time.

Quijano, BayernInvest: If our clients want to invest in illiquid assets they generally do so independently. But when they invest through us their main focus is on liquidity and relative value, so liquidity is very important for us. If we invest in illiquid bonds we have to be compensated for doing so. EUROWEEK: Is it possible to put a number on how much you would need to be paid for an illiquid instrument relative to a liquid bond?Quijano, BayernInvest: The question is, how do you evaluate liquidity, the value of which also changes according to overall market conditions? Liquidity was very valuable in 2008 and early 2009, whereas it was worth a lot less in 2007. It depends how comfortable you feel with your investment.Wimmer, SMBC: In our corporate banking department we can only buy Schuldscheine. The treasury department of our bank also buys very liquid bonds based on various liquidity parameters.

But from a corporate banking perspective we see the Schuldschein as a debt instrument which we compare with bilateral loans or syndicated facilities. We know that the Schuldscheine of some of the multinational issuers can be quite liquid, but the liquidity of Schuldscheine compared to the bond markets is not so much of an issue for us.

Schubert, Allianz: It might even be a problem for us if the Schuldscheindarlehen is liquid because then their valuation can be volatile on a mark to market basis, so it’s better if it isn’t liquid. Wimmer, SMBC: Illiquidity means you can’t sell at all. We know the other banks and we often speak to each other and sometimes an opportunity will arise when one bank wants to sell and another wants to buy. We do sell Schuldscheine on this basis, but that has not happened for quite a long time. We know that in theory we can sell, but we very seldom do so.Quijano, BayernInvest: An additional complication is that we have restrictions on investment in unlisted products. We have less of a problem with unrated bonds, but our public funds can’t invest more than 10% of their assets in unlisted instruments which restricts how much we can invest in the Schuldschein market. Some insurance companies have similar restrictions which can also cause problems. So if it comes down to a straight choice between Schuldscheine and unrated bonds, we would generally prefer unrated but listed bonds. Kuhn, BayernLB: These limits are discussed from time to time as the market environment changes and the instruments themselves change. Can you amend these limits or are they fixed permanently?Quijano, BayernInvest: Some rules can be amended. We are looking more at the Schuldschein market, especially when we see issuers like Stadtwerke München which is not available in other markets. So we can invest limited amounts, but to create a complete portfolio based only on Schuldscheine would be difficult, although for some customers we can create a special fund investing 100% in Schuldscheine. This would only be for a very small number of customers.Rupprecht, Siemens: Don’t forget that the Schuldschein was not designed to be a liquid instrument, because it is issued in favour of the investor. It can’t be traded like a bond. If I remember correctly I have not seen a single assignment. EUROWEEK: Are there restrictions on the transferability of Schuldscheine?Rupprecht, Siemens: As with the syndicated loan market, banks need to have our consent to make an assignment.EUROWEEK: Doesn’t this all mean that in the case of a deal like the Stadtwerke München Schuldschein you can have almost Eu1bn of orders from disappointed investors that will never have the opportunity of buying into the credit in the secondary market?Steer, SWM: Our aim is to attract buy-and-hold investors. We want to know that our investors are going to behave like business partners and stick with us.

We’re very happy with the investors that came into our Schuldscheindarlehen. But we have a huge investment programme so we will certainly be back in the market.

EUROWEEK: How much of a role do financial covenants play in the Schuldschein market? In the US private placement market, covenants can be very restrictive. Is this also the case in the Schuldschein market?Kuhn, BayernLB: It depends on the issuer. Companies large enough to issue in the public bond market generally don’t need financial covenants for their bond or Schuldschein issues. Further down the spectrum, however, smaller or medium sized companies which have strict covenants on their syndicated loans will usually be required to provide the same set of covenants for their Schuldscheine. And those may well be as stringent as they are in the US private placement market. Schubert, Allianz: We have some investments in companies with a turnover of more than Eu1bn, which aren’t rated by one of the three big ratings agencies. I wouldn’t describe these companies as small or mid-cap, but we would expect them to accept and maintain certain financial ratios throughout the term of the loan.

So it depends on the investor. Sometimes the issuer feels OK with financial covenants if he knows that the investor is a buy and hold investor.

It also depends on the arranger. In a highly competitive market if BayernLB were to go to a borrower like Siemens or Stadtwerke München and insist on financial covenants, the borrower would say, ‘thank you very much’ and give the mandate to LBBW or Helaba or Unicredit instead. But when we’re arranging a Schuldscheindarlehen, we will usually insist that companies maintain a number of financial covenants.

Senger, BayernLB: But from my point of view the big caps like Siemens, E.On and BMW don’t need financial covenants.Schubert, Allianz: All those companies have ratings. Rupprecht, Siemens: It is a question of the credit quality. If the issuer doesn’t have a credit rating but is considered a double-A or single-A borrower, then it’s fine not to have financial covenants. Schubert, Allianz: Not always. There are also companies with a single or double-A rating which need to maintain the right financial ratios. I’m not saying that applies to Siemens, but in other cases it would depend on the investor. I agree that there is no question of a company like Stadtwerke München, E.On or BMW accepting financial covenants. But companies know that Allianz can only invest large tickets if they have a rating or if they commit to maintaining certain financial covenants. Quijano, BayernInvest: I think the regulator also requires some financial covenants.Schubert, Allianz: That’s correct. A negative pledge and an asset disposal covenant are always necessary because of BaFin requirements. That is part of the documentation and it is as important for a company like Siemens or Stadtwerke München as it would be for a medium sized company. Steer, SWM: What about pari passu? If the borrower accepts these covenants with Allianz, would it also have to accept them from all other lenders?Schubert, Allianz: Absolutely. And this applies not just to the issuer but also to all the companies within the issuer’s group. Rupprecht, Siemens: If for the sake of argument we had no rating and were considered a single-A credit, even if we didn’t accept covenants we would still have to accept two clauses: pari passu and negative pledge. On that basis I couldn’t give financial covenants to one investor and not to the other.Schubert, Allianz: That is absolutely right — because of the cross-default clause. EUROWEEK: What about step-up or step-down payments?Rupprecht, Siemens: They are still used in the syndicated loans market. And you have to accept step-ups in a hybrid bond issue. But it is not something we at Siemens would accept either for a bond or a syndicated loan facility. Kuhn, BayernLB: I think step-up language can help borrowers avoid having stringent financial covenants because it allows them to provide a little more comfort for their investors. Trenti, SES: You mentioned the US private placement market earlier, and from our knowledge there is a continuous fight among issuers to avoid covenants in that market.

As SES raised $1bn in the US private placement market some years ago, you are well qualified to describe the major differences between that market and the Schuldschein market.

Trenti, SES: I would compare the US private placement very much with the Schuldschein market in that it is also a buy-and-hold market. Demand is much deeper than the Schuldschein in terms of the volumes you can raise — at least that has been true for us. But as you said earlier it is also a market that is very demanding in terms of covenants. EUROWEEK: A point that Paul made at the very beginning of this discussion was the length of time it can take for a borrower to come to market in the Schuldschein sector. Does that expose borrowers to a higher degree of execution risk in the Schuldschein market than in the corporate bond market?Steer, SWM: There are two different issues here. The first is the market risk, which you can hedge. The second is the liquidity risk, which you can’t hedge. You have to take a view on the market and then decide whether or not it fits in with your overall strategy. Rupprecht, Siemens: It depends on the corporation. If a company is disclosing on a quarterly basis, it could be exposed to more execution risk. But in theory only, because something very dramatic would have to happen, because otherwise the investor base you are targeting would be unlikely to change their views on your credit. But of course it makes sense to bring your issuance timetable in line with your reporting schedule, because you would not want to be signing around the time when you’re disclosing your figures.

I also believe that issuers in the Schuldschein market have to agree to a MAC [material adverse change] clause.

Otto, E.On: In the case of the larger transactions, I agree about the timing considerations. But in some of the more opportunistic Schuldschein deals we did for less than Eu100m, these usually start off with one of the banks approaching us with an enquiry from one to five key investors. This meant the process could be accelerated with all the documentation completed within a few days, which is similar to what you would expect in the bond market, although the sizes are much smaller in the Schuldschein market. EUROWEEK: BMW still holds the record for the largest deal, of €1.35bn. What is the capacity of the Schuldschein market? Could we see a deal for Eu1.5bn or Eu2bn?Rupprecht, Siemens: It all depends on your total debt requirement, on the mixture of your funding instruments and on the frequency with which you come to the market. Otto, E.On: It will also be dictated by investors. We’re talking about the smaller tier one and tier two investors who will be saturated much more quickly than the bigger institutions.Rupprecht, Siemens: What is your total outstanding Schuldscheine?Otto, E.On: Around Eu1.5bn.EUROWEEK: That suggests there is still plenty of capacity for you to tap into.Otto, E.On: If needed, yes.Rupprecht, Siemens: I guess that very much in theory you could calculate the capacity of the market by taking 25% of the total equity base of the Sparkassen. Kuhn, BayernLB: Returning to your question about the capacity of the market, we saw what was possible when Stadtwerke München generated an order book of Eu1.7bn. A rated company could easily generate the same sort of demand. Investors who put in orders for the transaction would have been happy to have been allocated 100% of their order.Otto, E.On: So there isn’t the order inflation phenomenon in the Schuldschein market that you see in the bond market?

This is what I was getting at when I asked about capacity. A book of Eu1.7bn is fine but it is still very small compared, say, to the order book of Eu16bn amassed by Siemens for its bond issue in February 2009.

Kuhn, BayernLB: No. The order books in the Schuldschein market tend to be more representative of genuine end-demand because when investors put their final order in with us it is like giving a hard credit commitment to a borrower. I can’t imagine investors signing up an agreement to take a particular amount without having the necessary credit approval for that amount.Krebl, BayernLB: Remember as well that in the bond market you can put in an inflated order and trade out of it in the secondary market the following day. You can’t do that in the Schuldschein market where you have to stand behind the real order you put in. This makes order books more stable in the Schuldschein market. Rupprecht, Siemens: But we should bear in mind that Stadtwerke München is 100% owned by the public sector. Doesn’t that make it a very different proposition compared with a private sector company?Schubert, Allianz: No, because there is no guarantee from the government.Otto, E.On: That makes it similar to EDF in France which has no formal guarantee, but everybody believes there would be some form of government support if necessary.EUROWEEK: What are the prospects for the internationalisation of the market? Kuhn, BayernLB: We’ve definitely seen some positive developments. However, as we were saying before, a big part of the investor base is accounted for by savings banks, and they would not be very eager to invest broadly across Europe or even further afield. Sparkassen will always look at the use of a borrower’s proceeds and if the funds are being used in their backyards and protecting local jobs that is a better argument for them than investing in overseas markets.

Nevertheless, we’ve seen borrowers like Schneider of France and National Grid of the UK successfully tap the market, haven’t we? I believe their deals were led by BayernLB.

Kuhn, BayernLB: Yes. We have seen some issues of size and quality from non-German borrowers that were very well received by the investor base. We would obviously more than welcome more deals like these because they would broaden our potential franchise. But it’s not that easy for overseas companies to tap this market, because investors are very selective.Rupprecht, Siemens: One limitation for Sparkassen is that they need to have a very good understanding of the credit. Another, is that the main task of Sparkassen is to support the development of their own regions. For that reason they will be rather restricted as to the non-German names they can buy.Senger, BayernLB: You’re absolutely right. It is easier to sell a German name with a strong brand into Asia, for example, than it is to sell non-German names into German investors. As we’ve already heard from Maurizio, SES has to use the Astra brand when selling Schuldscheine into the German market. Kuhn, BayernLB: But we also have the bond market, where German banks are also able to provide international and local issuers with access to the second and third tier investor base which has overlap with the Schuldschein investor base.Rupprecht, Siemens: The Schuldschein market is a niche market. It definitely provides an interesting opportunity for borrowers, but we shouldn’t over-emphasise its importance. EUROWEEK: But could the Schuldschein market not develop into a European market similar to the US private placement market?Kuhn, BayernLB: It was developing up until 2007. The Spanish cajas had become players in the market and were building up portfolios of German names. The Popolare banks in Italy were doing the same. They’ve all withdrawn from the market. Maybe in a few years there will be a more European flavour to the market again but I don’t see that any time soon.Otto, E.On: There already is a European private placement market, which is what we have been using extensively over the last three years. A large number of the transactions we’ve done have been denominated in different currencies under our debt issuance programme under European documentation. Most of this was triggered by reverse enquiry from different regions ranging from Hong Kong to smaller European communities. So I would argue that a European private placement market does exist. EUROWEEK: How much of a role have Sparkassen played? Presumably it is possible to execute successful transactions where the don’t dominate demand? Isn’t there also plenty of insurance company money in the market?Steer, SWM: In our transaction Sparkassen accounted for less than one third of the placement. Krampert, N-Energie: In our case, more than 50% of the placement was to Landesbanken and Sparkassen. I was very happy with this because it’s not necessary for me to have an international investor base. I want to know who my investors are and I want to be sure I will have stable investors.Senger, BayernLB: A successful Schuldscheindarlehen can’t be driven exclusively by savings banks. It will also need to be placed with tier two and even with tier one investors such as SMBC which is one of the biggest banks in the world. You need support from deep-pocketed investors capable of buying Eu30m, Eu40m or Eu50m in one shot. EUROWEEK: Is there sufficient supply to give investors exposure to a diverse range of industries?Quijano, BayernInvest: We would prefer to buy bonds, be they rated or unrated. But it is always good to see new names coming to the market, so if a company that has not issued in the bond market comes to the Schuldschein market, that is a good way of diversifying our portfolio. But our appetite for Schuldscheine is limited, so there would have to be a very good reason for us to buy a Schuldschein rather than a bond.Schubert, Allianz: There are five or six transactions in the market, which is not many compared to previous years. But we have had enquiries from issuers in other sectors — including healthcare, utilities and food. We favour these because they are defensive and generate stable cashflows. EUROWEEK: What is the outlook for issuance next year?Senger, BayernLB: I see an upward trend in corporate issuance, especially in the bond market. In 2009 we saw issuance of roughly Eu300bn in Europe, whereas this year we have had about Eu120bn, so we’re behind schedule. For example, neither E.On nor Siemens have done any benchmark issues this year. So we’ve seen nothing from the big frequent issuers and we are waiting eagerly for their return. Rupprecht, Siemens: Bond issuance in euros in 2010 has reportedly been 59% below issuance in 2009. Everyone is hoping that issuance will increase in 2011.Krebl, BayernLB: We have a lot of redemptions coming up and investors tell us they need opportunities to reinvest their money. Bearing in mind that Eu90bn in corporate bonds are maturing in 2011, a key question will be: how much of this will be refinanced? Since 2009 was such an exceptional year for bond issuance in euros, many companies used the strength of the market to secure liquidity for forthcoming years by pre-funding. Companies will be more selective in overall issue sizes, but will stay aware that all-in rates remain low and cash is king in tougher economic environments. Otto, E.On: Lots of issuers pre-funded in 2009. Many may need to refinance maturing issues in 2011 and 2012, but some smaller, unrated borrowers which want to diversify their sources of funding and step away a bit from bank funding may start to come to the market. Kuhn, BayernLB: We recently led a transaction for Sixt for Eu250m and we had well over 100 investors in the book. Rupprecht, Siemens: Bond issuance volumes in 2011 will also depend on M&A activity which seems to be decelerating. Several planned transactions have not been realised. EUROWEEK: Jörg, what conclusions would you draw?Senger, BayernLB: The Schuldschein market will continue to be very interesting but it will be a niche market. Rated and unrated bond markets will be the driving force for financing German and international corporates.
22 Nov 2010