As a result, German banks have come up with some inventive solutions involving securitisation and use of mezzanine capital.
Result: the Mittelstand get their capital and the banks generate much needed fee income.
“The needs of the Mittelstand are not being satisfied directly by the banks so instead they are going to the capital markets,” says Roman Schmidt, head of Commerzbank Securities Germany. “But what we will not see is a huge deluge of corporate bonds hitting the market as some have predicted. Instead, Mittelstand capital raising is taking other forms.”
Dirk van Daele, co-chairman of Dresdner Anschutz Mezzinvest, which specialises in mezzanine debt, says: “German banks are lending less to mid-cap companies as a result of adopting internationally accepted criteria and so new forms of capital raising for the Mittelstand have to be found. Many of these involve mezzanine capital structures.”
Noteworthy deals
Three notable deals have been done recently: Triumph Adler, Claas and the Preferred Pooled Shares (PREPS) deal. Triumph Adler, a Mittelstand company that has a big shareholding by Japanese photocopier maker Kyocera Mita, went through a refinancing that included replacing 50 loans from different banks into a syndicated loan with 11 banks, lead managed by Deutsche and Bayerische Landesbank. It also raised €30m in mezzanine capital from Dresdner Anschutz Mezzinvest.
In the PREPS 2004-2 deal, profit participation rights agreements with Mittelstand companies are pooled in a special purpose vehicle and securitised via notes. Altogether, mezzanine funds of €616m were provided to 66 German companies and one Austrian company. The notes were structured in three tranches, all of them with a seven-year maturity. PREPS were developed by Capital Efficiency Group (CEG) based in Zug, Switzerland and HVB was the lead arranger. (The deal was The Banker’s Deal of the Year 2005 for Germany.)
A lot of innovation in the capital markets is driven by accounting and tax issues and Germany is no exception. With its profit participation certificates no longer qualifying for equity status, Mittelstand company Claas refinanced them with €80m of subordinated debt. The notes were perpetual but callable after 10 years with the coupon stepping up from 7.62% to three-month Euribor plus 550 basis points. Dresdner Kleinwort Wasserstein was the book runner.
Schuldschein revival
The current revival of Schuldschein – a loan agreement unique to the German market – is also driven by accounting considerations. Schuldschein are mainly issued by public bodies such as federal state governments (Länder) and their attraction to investors is that they do not have to be marked to market under either German accounting rules or IAS39. While Schuldschein are usually bought and held, they are in fact tradeable over the counter, so this would appear to be something of a loophole.
“It’s very investor driven,” says Valentina Stadler, a credit analyst at HVB. “Insurance companies need higher yield and they approach the banks with requests for tailored funds using derivatives and structures.”
