CASE 3

Executive Summary

New issues of international high-yield bonds by German companies (between EUR 200 and 500 m issue size, in billions of EUR)

New issues of local high-yield bonds by German companies (between EUR 10 and 200 m issue size, in billions of EUR)

New issues of international high-yield bonds by German companies (between EUR 200 and 500 m issue size, in billions of EUR)

New issues of international high-yield bonds by German companies (between EUR 200 and 500 m issue size, in billions of EUR)

Share of first time issuers among German high yield bond issuers (EUR 10-200m since Q4-09)

Share of first time issuers among German high-yield bond issuers (EUR 10-500 m since Q4-09)

The market for corporate debt financings with sub-investment grade profiles in Europe, and in particular Germany, is undergoing a change as traditional capital providers (i.e. banks) are withdrawing either due to their constrained balance sheet situations (e.g. Landesbanks) or due to regulatory changes and a focus on higher rated companies. Most mid-market companies in Germany have a sub-investment grade profile.

Such a deep structural shift – away from banks and towards alternative providers of capital – inevitably creates distortions and generates opportunities for investors with experience in special situations investing across a wide range of debt instruments (loans, bonds, mezzanine).

Robus invest in this area and expects to see opportunities with outstanding risk-return profiles in an environment, which will be characterized by government austerity and low growth rates. Robus will invest primarily, but not exclusively, via secondary markets.

Market Situation and Investment Case

Shifts in the way sub-investment grade mid-market companies in the German speaking countries finance themselves:

  • shift towards alternative providers of capital and away from banks
  • shift towards longer term financings and away from short term revolving facilities
  • shift towards debt capital market instruments with larger groups of Investors (syndicated loans, bonds, private placements) and away from bilateral relationships
  • Increasing importance of secondary markets

These shifts have been driven and reinforced by a range of developments, which have had an impact on the capacity of banks to provide loans to mid-market companies with sub-investment grade profiles, such as:

  • Abolishment of state guarantees for Landesbanks (2005)
  • Introduction of Basel II (2007) and Basel III (2013)
  • Financial Crisis Part 1 (2007 to 2009) and Part 2 (from 2011)

The result has been an increase in companies’ demand for alternative capital, as shown by the large number of first-time issuers in recent German high-yield bond issuances. These developments have also lead to growth in the markets for bonds, syndicated loans, and private placements, as evidenced by the recent explosive growth in bond issuances by German mid-sized companies.

At the same time, the shifts described above have, in addition to promoting a new steady state, created dislocations and mispricings, which experienced investors can benefit from through the secondary and primary markets.

The current situation in financial markets, namely the large amount of sovereign debt and higher capital adequacy requirements for banks, puts additional pressure on banks to reduce their balance sheets and, in particular, to reduce their exposure to sub-investment grade companies in the secondary market. This serves to increase the number of investment opportunities and achievable returns.