Capital Efficiency Group, an investment banking boutique, is structuring a E500-1 billion collateralized debt obligation that will be backed by a pool of loans to German Mittelstand, or medium-sized, companies. The deal is slated to come to market this autumn and would be similar to a E249 million deal CEG is currently showing investors, according to Bernd Reuther, partner in Zug. He said the current transaction marks the first time medium-sized companies in Europe will be able to access the debt capital markets. The structure is similar to the way mid-sized U.S. financial institutions are raising cash through the increasing sale of trust preferred CDOs.
"There are 10,000 companies in Germany with sales between E50 million and E1 billion and only about 150 of those are listed or have public bonds," said Reuther. The others depend on banks for financing but are eager to find alternative sources of funding, he said, referring to a recent study that showed 70% of these companies are looking for non-bank financing. Interest is not limited to Germany. Reuther sees potential in Italy, Spain and France, where medium-sized companies face similar funding constraints.
The live deal, European Private Funding-1, will be backed by loans to 34 Mittelstand companies; HypoVereinsbank is the lead underwriter. "Two years ago this deal would have been dead in the water," Reuther said. But, given that German landesbanks are expected to lose their government backing and triple-A statuses next year, their ability to provide cheap funding through bank loans will be limited and mid-sized companies are searching for alternative financing. Officials said another motivation is that this structure allows the mid-sized companies to raise cash through a process that, for accounting purposes, is treated as equity financing.