A thriving market, born of fear

German senior debt financing is going strong as borrowers pre-empt an uncertain future.

In the alternative assets universe, first quarters are normally a form of new-year hangover that’s slow to clear. Whether it’s deals or fundraising, you can normally safely assume that – even in what turns out to be a record year – the opening three-month period will be subdued.

The German senior debt financing market has bucked the trend. According to the recently published MidCap Monitor from investment bank GCA Altium, the first quarter of this year saw 17 deals worth around €1.5 billion, a number and value of transactions strongly above the long-term quarterly average.

Added to the previous three quarters, the deal count for the last 12 months is the highest since the Monitor was launched in January 2013 (covering full-year 2012).

So what explains the market’s strength? It is often assumed that political uncertainty has a dampening effect on deal and fundraising activity by putting doubt in investors’ minds and making them more inclined figuratively to stuff their money under the mattress. In Germany, the opposite appears to be the case.

The context is the strong liquidity in the German market. The banks – keen to lend and benefiting from their relatively cheap cost of capital – have been joined by a small but growing band of debt funds, which were buoyed by favourable non-bank lending regulation introduced last year and keen to try to grab market share.

This has resulted in a broad lending market as well as a deep one. In the first quarter, almost two-thirds of deals in the German mid-market were accounted for by a combination of dividend recaps, re-financings and add-on acquisitions. This contrasts with a recent history which has seen the market dominated solely by buyouts.

Taking advantage of this benign environment, borrowers appear to be in a hurry to get things done. For example, local sources say recapitalisations in the German mid-market are now typically taking place around 15 to 18 months after the original deal, compared with a historic average of around two to three years.

Speaking to the same sources, borrowers are wanting the security of getting financing in place now amid fear of what lies around the corner. Political uncertainty abounds. Although some comfort is taken from a likely centrist victory in the French election, the German election is still to come, Brexit negotiations are yet to start, tensions are mounting on the Korean peninsula and parts of the Middle East remain in a state of turmoil.

Far from acting cautiously in the face of these disturbing events, borrowers are choosing haste. Who can blame them for doing today what may prove problematic in future?

*For more reflections on themes such as these, join a star-studded cast at our Germany Forum 2017 in Munich on 20-21 June, details here.