Syndicated loans and bonds
How corporates can make the most of bonds and syndicated loans
The COVID-19 pandemic will have a lasting effect on the economy. Particularly in terms of corporate funding, many businesses have an urgent need for action. Depending on the extent to which a business model has been hit by the pandemic, companies may either look to deleverage or undertake new investments in a particular area. Whatever the case may be – banks are an important partner in every situation. The current crisis is not one driven by the financial sector. As such, companies can continue to use the capital markets to meet their specific needs, using modern financing instruments tailored to their requirements.
Wie lassen sich drei Branchengruppen in den verschiedenen Phasen der Pandemie unterscheiden?
Negatively affected:
These include, in particular, companies in the aviation, tourism, entertainment, gastronomy and retail sectors that had to close during the lockdown.
Temporarily or indirectly affected:
Examples include the automotive industry and its suppliers, the manufacturing industry due to the initially slumped order situation, and various logistics sectors, whose revenues also initially fell.
Positiv oder wenig betroffen:
Pharmaceutical companies are certainly among the winners of the pandemic, as are online retailers. The telecommunications industry has generally proven resilient.
What CFOs and entrepreneurs should know about bonds and syndicated loans
The pandemic has made it clear that a well-equipped and strong financial sector is vital for both governments and economies. The government needs banks to distribute certain parts of state aid quickly and efficiently, while the economy needs banks as reliable partners to ensure access to funding.
Above and beyond traditional bank loans, the capital markets have an entire range of modern and customisable instruments for companies to choose from, depending on their specific requirements", says Mirko Gerhold, Head of Bond Origination & Solutions Corporate Clients. These instruments include corporate bonds and syndicated loans.
Lead Corporate Bond Origination & Solutions
Syndicated loans allow for higher credit volumes
Syndicated loans are often used to fund large projects as they allow companies to secure financing for larger volumes that a single bank would not be able to take on. There is another advantage for debtors: While numerous banks act as lenders, a lead manager acts as their single point of contact. Haas explains: "The syndicated loan market allows corporates to adapt funding to their business model, ensuring the best possible result in economic terms. Furthermore, syndicated loans are very flexible and easy to adjust to the needs of the client or to particular circumstances. This makes them very resilient financing instruments." This flexibility is important, for example, for manufacturers who often rely on international distribution of their products. When selecting the banks, these manufacturers can add partner banks in important target markets to the syndicate providing the funding.
Corporate bonds in high demand
During the COVID-19 pandemic, another financing instrument was in high demand: corporate bonds. "This was driven not only by a significant need for corporate funding, but also by high investor demand, which was further intensified by the European Central Bank", says Mirko Gerhold. In the early days of the pandemic, the capital markets evidenced a sharp rise in spreads and volatility. It was in this environment that central banks expanded their bond-buying programme, resulting in a swift recovery in the bond market and a strong resurgence in issuance activity. Since then, the high level of investor liquidity, the additional demand by central banks and the continuing low-interest rate environment have given rise to attractive financing terms for companies in the bond market.
How corporates can find the right financing partner
Companies wishing to make use of modern financing solutions should choose their partners wisely. Reinhard Haas says: "No matter whether our client is a small business, a medium-sized enterprise or a large corporation, we are proud to support them in all stages of growth with a seamless range of products and services." This range spans from pure funding to tailor-made capital market products. Mirko Gerhold adds: "We are very much aware of current developments, making sure that our products and advisory services are constantly adjusted to changes in the environment." One example is the growing importance of sustainable financing in the loan and bond markets.
Booming sustainable finance
COVID-19 has not harmed the trend in capital markets towards more sustainability. The issuance volume of new sustainable bonds, i.e. green and social bonds, has risen strongly and consistently from €219 billion in 2019 to €389 billion in 2020. The proceeds of green bonds are used to finance ecological projects, for example in the areas of renewable energy, energy efficiency or electric mobility, while social bonds finance, among others, access to healthcare, education or affordable housing.
During the pandemic issuance of social bonds has strongly increased and as a consequence, the share of social bonds in the overall worldwide sustainable bond market rose from 4% in the previous year to more than 30% in 2020*. The European Union (EU) also started to issue social bonds to fund programmes that will help protect jobs in EU member states. Notwithstanding the success of social bonds, businesses and governments alike continue to use the bond market to secure funding for eco-friendly or climate-friendly projects as well: in 2020, green bonds accounted for around half of sustainable issuance while another 20% were sustainable bonds that combined green and social purposes*. Over the past years, we have also seen a rise in sustainability-linked bonds, transactions not linked to a specific use of proceeds, but to the sustainability performance of the company in general.
However, it is not only the market for sustainable bonds that has grown, but sustainable loans have also seen growing volumes. Such sustainability-linked loans usually apply quite favourable terms if the borrower meets predetermined sustainability performance objectives. Reinhard Haas explains: "These loans allow our clients to demonstrate that while they want to be financially successful, they are also serious about their commitment to sustainability – and that this is not a contradiction in terms." There are also sustainability-linked promissory note loans. "Using sustainable finance instruments allows companies to underpin and communicate their sustainability strategy also in the capital markets, which may also attract demand from new and existing investors", says Mirko Gerhold. At the same time, political and social pressure to push corporate sustainability is rising.
We expect the rising trend of sustainable finance to continue. Investor demand is increasing, new standards are being developed and many political and regulatory initiatives aim at integrating sustainability into the capital markets. As a consequence sustainable finance will remain an important focus and a key area in Commerzbank’s product offering, to support our clients and always offer them the right and tailor-made funding solutions.
Summary
When looking for funding, companies can choose from a variety of instruments. And when making such a choice, they should not only take their business model and financing purpose into account but also the development of the markets, current trends, expectations and prospects. Commerzbank keeps an eye on all of these aspects, ensuring that clients are offered the best possible advisory and financing solutions in every situation.
GlobalCapital Syndicated Loan Award: An award winning strategy
A great success: Commerzbank received three awards this year at the GlobalCapital Awards 2022. The awards won were in the following categories:
- Best Arranger of Mid Cap Loans
- Best Arranger of German, Swiss and Austrian Loans
- Best Arranger of International Schuldscheine
In a year that was characterised by many uncertainties, a strong and resilient partnership with our customers is particularly important. This is underscored by our positioning role in our core markets. We have now held the top position in financing Mid-cap companies for the ninth consecutive year. "Our strong customer orientation defines our strategy, which is why we are particularly pleased to receive these recognitions in our core markets and product areas," affirmed Reinhard Haas, Global Head - Syndicated Finance.