"We need a triad of bank financing, capital market, and subsidies" | Börsen-Zeitung (2024)

Germany needs to restructure its economy, become more digital and environmentally friendly. This requires massive investments: 100 billion euros per year until 2045 is a magnitude that banks cannot handle alone. We need a triad of bank financing, capital markets, and subsidies.

On the contrary: As consultants and providers of various financing solutions, banks play a crucial role. The increased capital requirement is one thing. We also need different financing structures because sustainability investments are primarily long-term project financings, often associated with significant technological risks. Moreover, risk structures are changing in traditional financings.

For example, when a company replaces its entire production facility, the leverage initially increases due to this high debt-financed investment. Such investments usually have a negative impact on cash flow initially. Even though the investments are crucial, appropriate, and beneficial for the company in the medium term.

I see the role of banks primarily in advising, structuring, and potentially distributing investment financing to a sensible number of financiers. We know and understand our customers and can assess risks well as the house bank.

For instance, we already collaborate with the European Investment Bank (EIB). We arrange EIB financings and advise customers. They get more favorable financing through the EIB, and, thanks to a risk-sharing agreement with the EIB, we can represent a higher financing volume.

The mentioned cooperation program is designed for a credit volume of 400 million euros. Alone, we will not cover the transition finance volume with that. It is one of many collaborations with the EIB, KfW, and other development institutions. However, a significant component is a larger capital market – we need to further advance the capital market union in Europe to finance the upcoming challenges.

Progress on the securitization market could be implemented more easily. It is still underrepresented in Europe, accounting for only about one-twelfth of the US securitization market. I don't think the bad reputation of securitizations in Europe is justified. Banks can assess a customer's risk and use securitizations to gain financing partners to share the risk. That said, when I refer to the capital market as a significant and essential component for transformation financing, I explicitly mean the private sector as well.

I would very much like to see significantly more private debt in transformation financing – also because the leverage finance market is not large enough to accommodate the many billions of private debt capital raised.

In the past three years, companies have faced numerous challenges in the areas procurement and supply chain: Covid-19, supply chain disruptions, the war in Ukraine, inflation, high energy prices. This significantly raised the need for working capital. Perhaps an interesting statistic: While Germany's gross domestic product has increased by 20% between 2016 and today, the credit volume has grown by 40% in the same period. This illustrates the high need for working capital financing.

In 2023, we saw a reduction in inflation. Many companies secured their credit lines the year before. Therefore, it does not surprise me that the Bundesbank's statistics for the past year again showed fewer working capital loans. It was a normalization.

When benchmark interest rates rise, the liquidity costs, i.e., the refinancing costs for banks, also increase. The increase in the base interest rate balances out to some extent. Therefore, net margins have not increased as much as one might expect. Nevertheless, banks are experiencing an effect particularly in the area of risk premiums. If risks in the market increase, the spreads widen.

The difference between risk premiums for investment-grade and riskier non-investment-grade companies has increased. In a market environment where risk has a price again after many years, I observe larger margins in the credit business overall.

If we compare the current mood with the facts, the mood is worse than the figures. We had the same phenomenon last year when questioning whether we actually had enough gas to get through the winter. The mood must not become reality.

In sum, German companies have come through the many crises since 2020 relatively well – also because they entered the crises with a relatively high equity base and quickly reacted to the new challenges. While there are more insolvencies, we do not have a wave of insolvencies or a wave of restructuring. We are now back to a level we had before Corona – before the insolvency filing obligation was suspended.

Inflation rates are likely to continue to decrease. With a time lag, long-term and later short-term interest rates will also follow. This leads to lower financing costs and increases the value of discounted future cash flows – both increase investment returns. It could close the gap between seller expectations and bidder prices somewhat. This, of course, means more transactions in the areas of M&A, real estate, and other asset classes.

Overall, the pressure from asset classes is driving the financing market in 2024: In light of the digital and sustainable transformation, substantial investments are required in the corporate sector to ensure the competitiveness of the German industry. The same applies to the M&A business.

The downturn in the past year leads to the fact that more companies want to become active and want to sell irrelevant business units or make additional acquisitions. Also, private equity funds still have a considerable amount of "dry powder" to invest. In real estate, rising rents fuel the desire to buy property.

Hauke Burkhardt is Head of Trade Finance & Lending DACH and Global Co-Head of Lending at Deutsche Bank. As the head of corporate finance, the banker, who has been working for Deutsche Bank for over 16 years, is currently thinking a lot about how the future can be financed and what the future of financing looks like. Burkhardt completed a dual study program at the Dual University of Baden-Württemberg and started his career in corporate banking at Kreissparkasse Esslingen-Nürtingen before joining Deutsche Bank in 2007.