European banks eye state debt-for-equity swaps

European Banking Federation president Jean Pierre Mustier

European banks, especially in Germany, are pushing for hard-hit borrowers to have easier access to state equity support as the economic impact of the coronavirus continues.

Banks have extended hundreds of billions of euros in coronavirus liquidity as part of new state-backed loans programmes, run through development banks such as Germany’s KfW and France’s BPI.

They have nevertheless had to take part of the risk of loans to all but the smallest companies. Some of that lending already looks riskier than before, as new coronavirus restrictions proliferate and economies struggle to recover.

“[Across Europe, governments need] a very pragmatic way to extend capital or quasi-equity on a relatively fast basis,” says UniCredit chief executive and president of the European Banking Federation Jean Pierre Mustier.

Now it’s important to look at the solvability of the corporate client so that these clients can then borrow on an arms-length basis with the banks 

 – Jean Pierre Mustier, UniCredit

That’s why UniCredit, which owns Germany’s third-biggest private bank HVB, has spoken with the German government in order that coronavirus KfW loans might be converted into subordinated instruments, even equity.

Speaking during a Euromoney Livestream interview last month, Mustier stressed: “Specifically for the companies that went for these guaranteed loans, you can see an over-indebtedness building up, at least as a reference to the current profitability.

“Now it’s important to look at the solvability of the corporate client so that these clients can then borrow on an arms-length basis with the banks.”

Henning Block, managing director for debt advisory at Rothschild & Co in Frankfurt, agrees that this is needed, even in Germany, where businesses are generally healthier than elsewhere in Europe.

Block says: “A lot of KfW and state-guaranteed financings were based on an expecation of a quick rebound, and for certain sectors it’s taking longer than expected. Some companies might need a second liquidity injection in the near term, and maybe not just debt.”

Earlier this year, European governments set up funds such as Germany’s economic stabilization fund (WSF) in part to recapitalize companies. Italy has established a fund based on the WSF model. France already had various vehicles for state equity support for domestic corporations, before the crisis.

However, as part of his recently relinquished role at the German private banks’ association (BdB), then Commerzbank chief executive Martin Zielke added his voice to those saying that the WSF, for one, needs to offer medium-sized business a more standardized template for subordinated capital injections – and fewer conditions around things such as pay and dividends.

ECM issuance

Post-Covid equity capital markets issuance is well behind the US and the UK in continental Europe, even in Germany, which speaks to its much smaller pool of institutional investors. In any case, public stock issuance is still not an option for companies for harder-hit sectors, and obviously not for struggling unlisted firms.

“We need to find ways for public or private capital to invest in such companies, usually as a patient, minority equity investor,” Mustier continues. “It’s more important for Europe than, for example, the US, as in Europe we have a lot of unlisted companies, which by their nature cannot access the capital market.”

Mustier admits, however, that using state money to recapitalize unlisted companies will be even harder than offering them state-backed loans, due to the difficulty of arriving at a valuation, particularly after the coronavirus.