March 2017 – Germany’s medium-sized businesses broaden their funding basis. In particular promissory note loans are flourishing, and, in the ongoing low interest rate environment, both issuers and investors can benefit from their advantages. The POLIFILM Group, whose holding company has its registered office in Cologne, one of the largest suppliers of extrusion and protective film worldwide, has, for many years, been successfully using the promissory note loan – and cooperating with HSH Nordbank to place them for many years.
When a new car rolls onto the dealer’s forecourt anywhere in the world, when a fine carpet is rolled out for the first time in a hotel lobby or office, when a new LCD monitor is hung up on the wall or when an obscenely expensive high-tech kitchen made from stainless steel is put into operation, one thing is certain: Protective film plays a part. It is also highly likely that the film originates from one of the factories of the POLIFILM Group scattered around the globe, whose holding company has its registered office in Cologne. With around 1,400 employees, POLIFILM claims to be the global number two in the booming market for protective films. Also in the field of polyethylene-based extrusion films, POLIFILM ranks among the top companies in the world – from stretch films for integrating pallets to food packaging and tarpaulins, for example used in agriculture.
The family concern is meanwhile in its fifth decade of existence. Founder Lutz Runkel, born in 1948, is today the Managing Director of the holding company POLIFILM Holding GmbH. In 2011, his sons joined the management team with Bastian Runkel, born in 1976, representing POLIFILM EXTRUSION GmbH, and Christian Runkel, born in 1979, representing POLIFILM PROTECTION GmbH. The father & sons team is assisted by a large number of experts from outside the family, who, among other things, have, however, been on board for such a long time that they could safely be termed family members.
Walter Hantzsche, CFO at the holding company level, is one of these veterans. Full of pride, he looks back over the rapid development of past years and decades. His steady leadership as Chief Treasurer was decisive for the tremendous growth. “Our business is very capital-intensive”, says Hantzsche. “A special machine costs five to seven million euros. We have 60 such machines at our Bitterfeld site alone, the largest of its kind in Europe”, he reports. Around 200,000 tonnes of polyethylene film are manufactured at the factory in Saxony-Anhalt every year.
The machinery worth millions is generally financed over five years. The economic life, however, – assuming good and regular maintenance – amounts to up to 25 years. In the language of the treasurer, Hantzsche calls that a “gap in the financial planning”, that needs to be covered. In that respect, the borrower's note loan has been a tried and tested means of choice for POLIFILM for years.
According to Mr. Hantzsche, POLIFILM brings a new promissory note onto the market, typically with a term of five years, every two to three years on average. The multinational protective film company last issued a product of this kind in autumn 2016. HSH Nordbank, which has been an established finance and consulting partner of POLIFILM with respect to promissory note loans and more conventional working capital financing since the early 2000s, has again been part of the consortium.
With the last promissory note in the fall of 2016, POLIFILM raised € 70 million. “Issuing promissory notes has already become a routine for us”, says Hantzsche. He especially appreciates, about their partner HSH Nordbank, the effective and unobstructed opportunities to liaise with any potential investors. “The principal investors in our promissory notes have always been Germany's savings banks", says Hantzsche. As one of the leading federal state banks, HSH Nordbank has a real trump card here.
POLIFILM is very familiar with the investors in the promissory note loans – a real difference, for instance, to anonymous bonds. “And also in comparison to the classic syndicated loan, the promissory note loan is increasingly catching up. The product is currently very popular”, says Mark Bussmann, Head of Treasury & Markets at HSH Nordbank. In addition, an increasing number of promissory notes is being brought to the investors as part of private placements.
With a new issue volume of 19.7 billion euros since the beginning of 2016, the previous all-time high of 2015 had already been exceeded in the third quarter of 2016. By the end of 2016, the total issue volume reached over 26 billion euros. By comparison, the entire issue volume of promissory note loans in the German market in 2010 was only 4.7 billion according to information provided by HSH Nordbank Research.
“The most important drivers are the trend towards large transactions – often to refinance M&A activities – the temporarily increasing substitution of bonds by promissory note loans, and an increased supply of promissory notes by foreign issuers”, is the conclusion reached by a survey conducted by BayernLB in October 2016.
Corporate promissory note loans, known in short as “CSSD” (CBNL) are no longer the domain of medium-sized industrial companies and service providers. The emissions of large German industrial companies have in the meantime reached billions of euros. Thus, the sports carmaker Porsche, for example, raised 1.1 billion euros by issuing a promissory note in 2016. A total of four issues exceeded the billion euro threshold in 2016.
Investors prefer maturities of between five and seven years. Almost half of all promissory notes have such maturities. Given the continued low interest rate environment, shorter maturities are less in demand.
The demand side increasingly presents itself as being broadened and internationalized. The traditional buyers of promissory note loans are domestic banks, in particular, regional savings banks. In this way, they diversify their credit portfolio, which is mostly limited to the region. In addition, borrowers increasingly include insurance companies, pension funds, social security agencies and international investors. In individual cases, foreign investors latterly have accounted for half of the demand, in particular, with larger promissory note loans. German promissory note loans are currently very popular, especially with Asian investors due to the relative security they offer.
The promissory notes on offer are frequently over-subscribed, thus the market continues to remain receptive. Börsen AG Hamburg-Hanover stock exchange has adapted to accommodate this trend, and has, since March 2017, been offering a secondary OTC market for promissory note loans.
In the current low interest rate environment, all investors are on the lookout for investments with a better interest rate - and German promissory note loans fit the bill at a risk that is still manageable. Companies such as POLIFILM in turn make use of the current very low interest rate environment and risk premiums to raise debt on advantageous terms, often to fund expansions and takeovers.
Nonetheless, in the words of Mark Bussmann, as a product, promissory note loans are not as simple as for example traditional loans. “We are mainly in demand as advisers here”, explains Bussmann. That is also emphasized by Walter Hantzsche, who has learned, over the years, to appreciate the “reliable advice and the ability to listen of HSH Nordbank”.
Activities on the German promissory note market
Source: HSH Nordbank Economics
Bussmann’s team is currently involved with another theme on behalf of its clients concerning smart concepts for active financial management. “Depositing money in the bank at negative interest rates cannot be the aim”, says the HSH Nordbank expert. One possible answer to counteract the negative interest: Structured deposit products, a combination of short-term and long-term time deposits, or other sophisticated structured instruments involving put and call features.