The lure of Mittelstand bonds

The resilience of corporate Germany and poor yields from core European debt is a combination that is leading fixed income investors to broaden their scope, often to include paper issued by the Mittelstand, says German market broker Close Brothers Seydler Bank.

Few of the Mittelstand, the small- and mid-sized businesses that lie at the heart of Germany’s economy, are publicly listed. Because of this they fall below the radar of many investors. Nevertheless, they cover all business sectors worth a combined €2trn in revenue and employ 60% of the country’s workforce, according to the Institut für Mittelstandsforschung.

Close Brothers Seydler Bank, an equity and bond broker to this universe, says the companies are seeking alternative financing as Germany’s banks – which historically stood behind most of their loans – shrink lending books and reduce risk due to the financial crises since 2008, and as they are required to meet capital reserve regulations such as Basel III.

René Parmantier, the bank’s CEO, says the market in bonds of ­Germany’s largest companies (DAX 30) has grown threefold over three years. He expects the €2.5bn ­Mittelstand bond market to grow, too, as investors look beyond large cap and government paper for returns.

Parmantier says the Landesbanken, which took on financing this universe five to ten years ago, face their own financing problems after many lost money on US sub-prime instruments.

He says: “Given Basel III bank capital requirements, it has been a problem for most of the German small- and mid-cap companies to refinance this way. We have seen a window opening up for bonds, especially among mid-sized companies.They have wanted to become more independent of banks, and the kinds of corporate bond structures they use are often covenant-free.”

CBSB informs its 1,000 European institutional investors about the market via conferences, company roadshows, and through publishing regular research. The firm helped Dürr issue the segment’s first bond, worth €150m, in September 2010.

It has since assisted a further 13 companies with issuing plain vanilla debt, ranging from beverage makers (Underberg) to publishing house (Bastei & Lübbe), but is also active in issuing convertible paper.

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