July 5, 2018 – The end of the first half-year is a good opportunity to take stock of the performance of the SME bond market in the year 2018 to date. In December 2017, we had already reviewed the market developments of the past year. The conclusions drawn in this review and especially the outlook on 2018 can now be subjected to an initial reality check.
We define SME bonds as listed fixed-income bonds with denominations of 1,000 and a maximum volume of EUR 150 million. Our analysis is based on our own research of publicly available information as well as the data of Anleihen-Finder.de.
More issues than expected
According to this information, a total of 14 SME bonds with a planned volume of roughly EUR 652 million were issued by 13 companies in the first half of 2018. This is generally a pleasant number, as the leading issuing banks had projected an average of 15 issues for the full year 2018 in our December 2017 survey (compared to 23 in 2017). It should be noted, however, that this figure includes two bonds issued by S Immo, a listed Austrian real estate company, which meets our above definition, but whose market capitalization of over EUR 1 billion cannot be compared with that of a typical SME issuer. But even if S Immo is ignored, the number of issues is likely to be much higher at the end of the year than originally expected.
(Too) Strong focus on real estate bonds
The capital market’s high affinity for real estate was also felt in the SME market in the first half of 2018. Of the 14 bonds issued, more than half (8) were placed by issuers (7) from the real estate sector. A further bond was issued by a financial service provider arranging investments in energy and real estate projects. In view of the good (macro)economic environment and the sector’s typically stronger use of debt capital, the focus on real estate is not surprising. But the SME bond market has suffered from an insufficiently balanced industry mix before. The first wave of defaults was dominated by companies from the solar and energy industry that were affected by sudden changes in the global economic and political conditions. The strong focus on real estate again reflects a one-sided risk exposure that may turn out to be a disadvantage at a later stage.
Direct issues not very convincing
Another trend of the year 2017 also continued, with little-known companies daring to place their issues directly in the bond market, i.e. without professional support from a bank or communications specialist. The success of the two bonds issued this way in the first half of 2018 cannot be measured precisely. But the fact that the volume placed was not communicated after the start of trading speaks for itself. A recent direct issue of two bonds, which started in December 2017, also ended without the final placement volume being communicated. This approach is in contrast with the (unwritten) laws of the capital market and for outsiders it is a confirmation for the stigma of the grey capital market that is associated with direct issues. Whether this is rightfully so or not, one thing is for sure: if you want to convince the capital market in the long term, you should not issue your bonds directly without assistance as this entails substantial reputational and placement risks.
Exchange offers successful thanks to positive capital market track record
Among the successful issuers of the first half of 2018 were primarily those companies which had already gained a name for themselves in the capital market. Half (7) of the 14 bonds issued were placed by existing issuers that wanted to refinance an existing bond by means of an exchange offer. In addition, there was a bond issue by Accentro Real Estate (formerly Estavis) which was associated with the retroactive replacement of an outstanding convertible bond. Eyemaxx Real Estate was the only one of the above issuers that made a public offering after the exchange. All other issuers combined the exchange with a private placement. In seven of the eight refinancing issues, the interest rate was reduced compared to the previous bond, in most cases quite substantially. This shows that the SME bond market remains open to issuers with good track records, allowing them to cut their financing costs significantly.
Eight of the 14 bonds were fully placed, including five of the eight exchange/refinancing bonds. Six bonds have not been as successful as desired (so far). The fact that six of the eight listed companies were able to fully place their bonds additionally confirms that capital market readiness and transparency are important success factors especially in the much-blamed SME market.
Stock exchange segment of no importance
It is thus no contradiction that the stock market segment is less and less important for an issue. In any case, all of the bonds – except for those placed by the stock exchange listed issuers, Ferratum and S Immo, which are listed in the prime segments of the Frankfurt Stock Exchange and the Vienna Stock Exchange – are listed in unregulated segments, preferably in Frankfurt. No new bonds were placed in the Scale segment, the quality segment for SME bonds of the Frankfurt Stock Exchange. In view of the results mentioned before, this does certainly not mean that investors expect less transparency. As outlined above, most of the issuers were companies with an existing capital market track record.
Only three new issuers ‑ Balanced mix of private placements and public offers
The number of “real” new issuers, however, was disillusioning in the first half of 2018. Only three of the 13 issuers were new to the capital market. And only one of these three debut bonds – the R-Logitech bond – was placed in full, probably benefiting from the confidence placed by investors in the sister company, Metalcorp, which had already issued several bonds in the SME market in the previous years. The two debut bonds that were not fully placed were direct issues from the real estate and energy sectors.
Seven of the 14 issues were private placements, while the other seven also included a public offer.
Conclusion: Capital market out of conviction versus doing only what is mandatory
The first half of 2018 once again proved that good communication is essential in the SME bond market. A company wishing to enter a market that has suffered from many defaults must be able to make up for information gaps among investors, ensure capital market readiness and have a credible story and a convincing approach to create trust. Any company merely doing what is mandatory will not be able to rely on investors’ trust in the long term, especially not in difficult times. On the other hand, there are a number of successful examples of how companies can prove themselves in the market by issuing an SME bond and subsequently grow with the capital market. These examples include many refinancing exercises of the first half-year, where the issuers successfully refinanced existing bonds with new issues and reduced the coupon noticeably in the process.
Once a company has established a broad investor base or has high placement power thanks to its brand or good reputation, a direct issue may be an option. But this should certainly not be the first choice for a new issuer. We therefore recommend that SMEs considering using the bond market differentiate themselves from negative examples, create capital market readiness and thus lay the basis for a successful issue.
Needless to say, at the end of the day the success of an issue and, consequently, of the SME bond segment as a whole depends on investors – but the larger the number of good issuers, the greater investors’ interest in this market segment.
 Following publication of our study “ SME Bonds: Review of the year 2017 and outlook 2018“, there were another three issues, which increased the total number of issues in 2017 to 23; see also Focal Point;