PARTICIPANTS: ? Fredrik Altmann,head of capital markets, BMW. ? Christian Kammann,group treasurer, Heidelberger Zement. ? Verena Volpert, financial director, Bertelsmann. ? Erhard Wehlen, group treasurer, Linde. Q.How much of your funding is achieved in Germany? How has this figure changed over the last 12 months? WEHLEN: We would not distinguish between German investors and other investors. Linde's policy is to widen the scope of our investor base and we have contacts with investors in several European countries including Italy, France, Scandinavia and Holland. I would say that Linde is best known in Germany, so we are very pleased with this investor base. But at the same time we wish to expand into other European countries and internationally, for example into Japan and the US. We try to set certain targets and sell our paper to as many investors as possible, so we are open to international investors. I would estimate that at the moment between one third and 50% of our investors are international. ALTMANN: BMW has always had a very stable investor base but German investors only contribute about 5% of our funds. This has been the case since we signed the programme in 1994. However Europe is an important market for us. KAMMANN: For the moment none of Heidelberger Zement's funding comes from Germany. It all comes out of Japan because we're only interested in short-term maturities and the pricing there suits us. So far we've issued ¥31 billion-worth ($292.77 million). Interest from Germany has definitely tailed off. There has been no medium-term or long-term interest all this year, and for us alternative sources of funding have been cheaper anyway. VOLPERT: Bertelsmann does mainly private placements, so it is very difficult to know. Although I estimate that about 80% of the volume of our issuance is in the public sector, the greater number of trades is in private placements. Our contact is with the dealers only, so in most cases we really don't know who our investors are or where they are from. Q.How has German investor demand changed over the past two years? KAMMANN: German investors are more familiar with the MTN market now and are more inclined to look at it. German banks have become more accepting of the market and if we were to find a trend, it would be one of general acceptance and greater knowledge. WEHLEN: We only signed our MTN programme in April this year, so it is difficult to say, because up to autumn of last year we haven't been on the debt side - we have previously been a cash surplus company. ALTMANN: Investor demand has been more or less unchanged for us. We place mainly vanilla notes, but we also do some structures if there is demand for them. Q.How do you market your name outside Germany? WEHLEN: We hope the issuance of debt will go some way to establishing Linde's name. We have done roadshows for our first euro1 billion ($900 million) benchmark bond issued in June this year. For the MTN programme we will start getting in contact via banks and investors on a one-to-one basis. But there is already good knowledge of the company in Germany and central Europe. ALTMANN: We feel we do not need a roadshow because BMW's name is very well known domestically and internationally. As we are lucky enough to have good name recognition we just use our dealers to sell our notes. But we also accept reverse enquiry. KAMMANN: We tried to talk to as many banks as possible both from our dealer panel and for reverse enquiry deals. We have also started marketing ourselves directly to investors. We recently launched a large benchmark deal and four people were involved in a week-long roadshow for this all around Europe. But we have also had interest from Japanese investors who have come to Heidelberg themselves to see what we can offer them. Investors are quite keen to do their own research. VOLPERT: We have marketed Bertelsmann's name, but not actively for MTN purposes. There was no full-scale roadshow, although when we set up the programme we held a presentation in London for some banks. Up until now there has been no demand for marketing our name and there is no big need for additional placement, because our financial needs are not high. Whether or not we will market our name in the future depends on our financing needs. The financing of corporates is changing radically. It is moving from bank financing to capital market financing. So it depends on the needs of Bertelsmann. Q.What contributions can online trading make towards your funding strategy? ALTMANN: Online trading would increase transparency and would enable a wider distribution of paper. But I don't think the e-revolution will happen as soon as some people say, and we are reluctant to get involved until we have seen a system that definitely works and which is accepted by the principal market participants. It is also difficult to say what would happen to pricing. VOLPERT: This is not relevant at the moment, although it could be in the future. More things are handled online and this is a clear trend. I think online trading is more important for banks than for issuers because it will affect how deals are placed, but it will not really bring us closer to investors. KAMMANN: I don't think at the moment that it's going to be very important. From our perspective there isn't much added value in getting involved. It is more interesting for borrowers which issue large volumes. In terms of greater transparency, those investors that want to investigate will see we have a benchmark deal outstanding and should get an idea of what we are paying. WEHLEN: It doesn't have any impact on our funding strategy at the moment, but it could give us access to a broader investor base and smaller customers, so we might consider it in the future. Q.How has the lowering of corporate taxation affected your funding via the MTN programme? KAMMANN: For the moment there has been no direct effect. It has put Germany at slightly less of a disadvantage compared to, say, Holland, but nothing from the issuance side. Generally though it could ease merger activity, which could then make for a more lively MTN market. But this won't necessarily apply to us. Q.What made you decide to get credit ratings? And are they more important now than name recognition? WEHLEN: We had a very clear idea at the end of the Deutschmark era that the market was becoming more professional and that it would therefore be increasingly necessary to have a credit rating. The start of this process was at the beginning of 1999. It is difficult to say which of the two elements is now more important. At the moment one of our US competitors, which has a comparable rating and bond maturity, is trading around 20 yield basis points higher than we are. One of the explanations I can find for this is that we have better name recognition in the market. KAMMANN: We got our ratings at the beginning of the year. One could have made a case for getting them earlier, but we absolutely needed them for this benchmark, so that spurred us into action. We're not like Mercedes-Benz who have brand presence even abroad. For instance nobody knows the name Heidelberger Zement in the UK. We call ourselves Castle Cement there. It's so useful now to have a rating, as dealers can say this is the company, this is their rating, this is what they can give you. We would normally have expected a higher rating than they assigned - BBB+/Baa1 - but because of our indebtedness it's fair. ALTMANN: We don't have a rating at the moment. Moody's has rated us A1, but this is an unsolicited rating. However I think that ratings will become more and more important for issuers trying to fund in the capital markets. Right now though we are in a very good situation with our name recognition factor. VOLPERT: Bertelsmann doesn't have a credit rating and we have not made the final decision to obtain one either, so this is an open issue for us. There is a clear trend towards getting credit ratings and if this process continues, it will be a must for the company. And Bertelsmann is a company that will go to the capital markets in future, so it will be important. The credit rating is important, but name recognition is also important. There are some very successful issuers that are loved by the market, and this is down to name recognition, rather than the credit rating. Q.How has the increase in mergers and acquisitions in Germany affected your use of the private MTN market? WEHLEN: We have been affected, but I would say that M&A activity is spread across Europe, not just in Germany. Last year we acquired AGA, the Swedish gas company, making us the top European company for industrial gases, in terms of turnover. This was the reason for our financing needs. But the Euro-MTN facility was set up not only for M&A funding, but also for funding growth within the company. These two factors were consolidated in the programme. KAMMANN: Our mergers and acquisitions have had a significant impact on our MTN activity. The programme took a big leap last year when we bought Scancem but I don't think the link between mergers and bond activity elsewhere in Germany will affect us. VOLPERT: Bertelsmann has a more global perspective, so Germany is not such a big market for us. Europe is not really so important either compared to the US market, which is also important regarding the revenue side. In the past year we have made some acquisitions, including Random, the US publishing house and the German company Springer Professional Information. The MTN programme has provided funding for us, so the programme has been very helpful. ALTMANN: Mergers and acquisitions in Germany have been grabbing people's attention but it has not affected our funding strategy at all. Q.Do you think Germany is feeling the effects of a weak Euro? KAMMANN: The euro has given us wider international scope for access to investors, but in terms of bond pricing there isn't really much difference. When we use the swap market we can get away with losing just one or two basis points, so it's not too expensive. WEHLEN: At first glance we thought no, but there have been some effects. The weak euro brings higher inflation and thus has an impact on interest rates. The level of ECB interest rates is also due to the weak euro. There is less capital flow into Euroland and a higher one into the US. But there is also a counter-effect: our exports are better - for example into the UK. So in terms of exports the weak euro is good for Linde. ALTMANN: Of course the weak euro means exports are increasing to non-euro countries and these markets are very important to us. But in terms of MTN issuance we are happy to issue in any currency that will get us a good price. VOLPERT: For Bertelsmann the weak euro has had no major negative impact, mainly because we have such a high volume of US assets. So for us a strong dollar is good news. Q.What will be the biggest changes in the market over the next 12 months? KAMMANN: My view would be that MTNs will continue to grow in acceptance. Whereas in the past we would have done a stand-alone bond, in this market we were able to do a benchmark bond off the programme without any extra documentation. German corporates will use their MTNs more and more and will look to get involved in bigger trades to perhaps fund all their capital market requirements. I can see more German corporates signing too, because from our perspective it's been a very positive experience. ALTMANN: There will be more competition as more and more companies join the market. We are focused on the Euro-market and I think that by setting up their own Euro-MTN programmes the lower-rated companies will be a big factor in market growth. And competition is always good for the investor. VOLPERT: There will be increased competition between corporates, as has already been seen. And the UMTS licences will have a big impact on the market. In Germany the six mobile phone companies who bid for the UMTS licences now collectively owe the state Dm100 billion ($46.02 billion). They will need to refinance this cost and may turn to the capital markets to do so. Ratings will also be increasingly important as more companies obtain them. WEHLEN: For us, as a newcomer in the debt market, it is difficult to foresee market changes, but there are two things. I imagine that the market will become more professional, like in the US market. Syndication will become more transparent and there will be more structured trades and subordinated instruments, instead of plain vanilla. The second aspect is that financing through banks is stagnant and so there will be a move into the debt sector with more corporates moving further into the capital markets.
October 13, 2000
