Move over, Goldman Sachs Group Inc. Germany’s savings banks are emulating the titans of Wall Street to become an unconventional source of funding for private equity deals.
(Bloomberg) — Move over, Goldman Sachs Group Inc. Germany’s savings banks are emulating the titans of Wall Street to become an unconventional source of funding for private equity deals.
Lenders ranging from Kreissparkasse Biberach near Lake Constance to Sparkasse KölnBonn in the Rhineland are upping their bets on small and medium-sized leveraged buyouts, helping plug a financing gap left by the retreat of larger international peers.
It’s a sign of how Germany’s regional play-it-safe banks, whose focus was always supporting households and small business, are embracing riskier, higher-return strategies. Last year, as the threat of recessions squeezed credit markets and dealmaking, the Sparkassen kept up the pace.
“We did not pump the brakes,” Kreissparkasse Biberach board member Kurt Hardt said of the bank’s lending on buyouts in 2022. “LBO financing allows us to diversify our business. There are also good margins.”
But the moves have raised concerns these lenders are taking unnecessary risks and overstepping mandates to provide the regional economy with credit—potentially exposing peers and governments to losses in the same way the larger Landesbanks did after the 2008 financial crisis. The European Central Bank recently slapped firms including Deutsche Bank AG with additional capital requirements for leveraged lending, underscoring how regulators remain watchful of the practice.
Bigger Bets
Located in a sleepy namesake town with an imposing Gothic church overlooking its market square, Kreissparkasse Biberach issued 10 LBO loans last year, two more than in 2021—the busiest ever year for private equity deals. It’s willing to increase the size of its LBO book to €500 million ($531 million), said Chairman Martin Bücher. “We still have some headroom we’re willing to use should opportunities arise.”
The likes of Kreissparkasse Biberach have been picking up business left by larger peers that have shrunk leveraged financing desks in recent years. They’ve even hired some of the financing bankers who’ve lost their jobs in restructurings to help build their own teams, according to Michael Josenhans, a partner at law firm Freshfields Bruckhaus Deringer LLP.
“Savings banks have been active in LBO financing for a number of years, but have become more visible in recent months as other debt providers are scaling back,” Josenhans said.
This kept at least a small financing channel open in 2022, a year in which the value of loans issued to back private equity deals in Germany fell 65% to €6.6 billion, data compiled by Bloomberg show. Savings banks’ LBO businesses helped grease takeovers of companies including container provider DBV Baumaschinen- & Baugerätevertriebs GmbH by private equity-backed B plus L Group and logistics firm Duvenbeck Group by Waterland Private Equity.
LBO lending offered Germany’s savings banks a higher-margin business in the years when ultra-low interest rates were crimping the amount they could earn from retail loans. It also opened up a new customer base in the form of acquisitive private equity firms and gave them a way to maintain historical ties with local businesses being taken over.
“Nearly half of the family-owned businesses in the Cologne-Bonn region will undergo a generational change in the next few years,” said Uwe Borges, head of corporate banking at Sparkasse KölnBonn, one of Germany’s biggest savings banks with an LBO book in the high double-digit millions of euros. “Where there are no successors, leveraged buyouts are an option.”
His comments are echoed by Kai Scholze, a board director at Kreissparkasse Esslingen-Nürtingen, who said his bank operates LBO financing in part because it doesn’t want to lose customers that get acquired to competing banks. “The margins are of course higher in this business than with corporate financing, but this is also associated with a higher risk.”
Based in the Medieval town of Esslingen on the Neckar River in Germany’s south, Kreissparkasse Esslingen-Nürtingen has a leveraged loan book of about €120 million. It ventured into the business around a decade ago and, like many of its peers, operates at the shallower end of the buyout market, where banks typically offer financing of about €10 million per transaction.
Michael Schuhmacher, a partner at German law firm Noerr, estimates the Sparkassen now have a roughly 20% share of the market for LBO financings of as much as €20 million. They’ll also team up for bigger business, according to Scholze.
“Sometimes seven or eight savings banks work together to get financing volumes of €70 million to €80 million done,” Scholze said.
Risky Business
Club deals help spread the risk of becoming too exposed to periods of macroeconomic turmoil, such as the 2008 global financial crisis, which saw Germany’s larger Landesbanks suffer as a result of positions in the then toxic market for mortgage-related securities.
Not everyone is convinced about the move into riskier assets.
Detractors argue savings banks, which are overseen by BaFin, were insulated from the impact of 2008 precisely because of their focus on local business. This was not the case for Landesbanks like WestLB and HSH Nordbank, which ended up getting bailed out by the state.
“Even if the majority of the savings banks are aligned with the traditional business model of customer lending, there are a number of institutions whose business policy not only has nothing to do with fulfilling the public mandate, but which also take very high risks on the capital markets,” Ralf Jasny, a professor at Frankfurt University of Applied Sciences, wrote in an analysis of Sparkassen investment policies in 2020.
The banks themselves say they have a number of measures in place to avoid nasty surprises. Sparkasse KölnBonn looks to back deals involving buyers with robust ownership structures, Kreissparkasse Biberach often wants a target’s local lender involved, and Kreissparkasse Esslingen-Nürtingen likes LBOs in which the buyer writes a bigger equity check.
Customers of Germany’s roughly 350 savings banks are offered an extra layer of security from an institutional protection scheme aimed at safeguarding deposits. Under such a scheme, a lender that gets into financial difficulty can receive support from others in the network.
Skeptics like Jasny remain wary.
“Let’s hope it doesn’t end like Lehman Brothers,” he said in an interview.
–With assistance from Jacqueline Poh and Aaron Kirchfeld.
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