How does Deutsche Bank see the private debt market developing on both sides of the Atlantic, and what is its role within that market? In search of an answer, David Turner talks to Dean Kennedy, Global Transaction Banking product manager for Europe, the Middle East and Africa; Nick Bland, head of structured credit services for EMEA; and Stephen Hessler, Americas head of structured credit & loan services.
What is your business and how does it fit into the bank?
The Corporate Trust product of our Global Transaction Banking division provides key services for transactions in the debt market, including agency, trustee, account bank and other administrative services. Products include project finance, securitisation, collateralised loan obligations, and various other forms of loan administration.
Within Deutsche Bank, this business dates back to the late 1990s. Through its acquisition of Bankers Trust, it inherited a leading position in this area.
How is this market developing and changing?
These various types of loan and forms of debt are much more likely to be supplied by institutional investors than in the past, whether that is debt funds, pension funds or insurers, though the banks are still key players in the market. The first institutional investors were large, but recently smaller actors have moved in.
What kind of services do smaller institutional investors need in private debt?
Smaller pension funds and insurers that directly subscribe to these deals are less sophisticated than larger institutional investors or bank syndicates. This means that we are sometimes called upon to provide additional or enhanced services. They need a bit more from us on a day-to-day basis when it comes to reporting requirements. For insurers this includes Solvency II reporting, which they have had to do since the beginning of this year.
Asset managers directly investing in private debt may also find themselves in small club deals, rather than restricting themselves to bilateral deals. For these club deals, an agent is typically needed to sit between the borrower and the investors, to deal with the cash flow and covenant compliance related to the investment. The asset manager may not have the infrastructure to be able to put themselves forward for this role, in the way that banks do. However, because of our long term experience in the syndicated loan market, we are quite prominent in this area.
Speaking more generally, we have to be more hands-on to bridge the gap in knowledge and systems that is sometimes present amongst clients and/or counterparties that are new to a particular market. Some are looking for an institution such as Deutsche Bank that can provide the back and middle-office support for private debt investment. However, our solutions in this area can be tailored to meet all needs and sizes, including the requirements of larger investors.
What opportunities and challenges do recent developments in Europe, such as governmental and central bank initiatives, present for private debt?
The Juncker Plan could really boost project finance over the coming 12 to 18 months. This was the plan announced in 2014 by Jean-Claude Juncker, president of the European Commission, to generate €315 billion in spending on infrastructure between mid-2015 and 2018. EU institutions will use €21 billion in EU funds as a guarantee to raise private cash for projects in the capital markets.
The creation of a pan-European private placement market would be extremely good for private debt, but whether or not industry and government manage to do this remains to be seen. There are certainly some positive recent developments. The Loan Market Association is trying to harmonise syndicated loan agreements across Europe through the creation of templates; since the beginning of the year the UK government no longer levies withholding tax on private placements that meet certain qualifications – making it much easier for foreign investors to participate in UK private placements.
We are well-placed to benefit from any move towards pan-European private placements because of our strength in several European countries. We are, for example, long-established in Germany’s Schuldschein market – private placements through which German SMEs raise money from domestic lenders. This market itself has evolved in recent times, with the Schuldschein instrument being used to part refinance a more complex operational offshore wind park in Germany.
Another very current issue at the moment is Brexit. What effect will that have on private debt?
There is no clarity about what this means for investors from an operational point of view and a capital market perspective. It could mean higher investment risks, but it could also mean higher returns to compensate for those risks.
One concrete effect which we have already seen is the August cut in UK interest rates, which has generated cautious optimism for the time being. We have even seen some over-allocation to private debt, relative to investors’ neutral ratings, since the rate cut.
Have you seen any promising developments for private debt in the US recently?
We have seen a really good year for project finance, and think this could continue into next year. There is a lot of pent-up demand for infrastructure that needs to be met across various industries. The US has poor infrastructure compared with Europe in many respects, such as the quality of its interstate highways. Gridlock in Washington over remedying this has prompted solutions based on private institutional money.
There could also be a surge in private debt deals after the 2016 presidential election, or even before if it becomes more clear who is likely to become President. Firms often hold back from investments during this contest.
What effect will the US interest rate cycle have on the private debt market?
After the Federal Reserve raised rates in December 2015 we saw an immediate reaction. To give an example of how private debt markets responded, we assisted with a large refinancing deal for a European transaction. The initial deal had been done with banks, but the refinancing was done with institutional investors from both the US and Europe, whose rates looked more competitive relative to what the banks could offer.
Looking to the future, what distinguishes Deutsche Bank in the private debt/direct lending space?
Transaction Banking has been singled out by the management board as a growth business. This means a lot of investment: Deutsche has earmarked spending of €1 billion by 2020 to improve technology across Global Transaction Banking as a whole, and a considerable portion of that will go into this division.
This is important because the solution we offer is based partly on an ever evolving technology landscape. Clients are being asked by their management and shareholders, and their own customers, to do a lot more with a lot less; technology enables that. Deutsche is a major global bank, and we have devised solutions which are global and adaptable.
Having said this, our clients do not just get a system that provides them with x, y and z, based on various technical solutions. They also have someone they can speak to on the end of the phone.
Is there any role for new technological concepts?
We aim to support a lot of initiatives in fintech and blockchain, two words of choice in this space at the moment. Clients are looking for efficiencies and good returns on their spending in this market, and we think fintech and blockchain can provide these.
What does Deutsche’s history tell us about the way that it can deal with the future?
Our expertise in debt markets is embedded within the bank. We have been able to use our many years of experience and knowledge of the US market to assist clients with private debt in Europe, where the situation mirrors what happened on the other side of the Atlantic.
We have moved with the times at several points and in several ways in the past, in particular, responding to increased regulation following the the credit crisis.. Above all we anticipate and cater to our clients’ needs. Asset managers in this space have been developing their strategies in different ways and providing different tailored solutions. Deutsche Bank knows that it must always be one step ahead, and is well-equipped to do so.
This article is sponsored by Deutsche Bank. It appeared in the Future of Private Debt supplement published with the October 2016 issue of Private Debt Investor.