SME bonds in 2013: Breakthrough, slump, fresh start

Our 2013 review of the SME bond segment paints a mixed picture.

It was gratifying to see more than 30 new issues come to the market as well as the numerous top-ups and the fact that Bastei Lübbe was the first bond issuer to cross over into the stock market. However, there is no looking past the (too) many insolvencies, the wide range of bond price fluctuations otherwise only seen in equities and a number of communication glitches.

Breakthrough – Set up only in 2010, the German SME bond market still has some growing up to do but a breakthrough was certainly achieved in summer 2013. By the end of July, a total of 24 SME bonds were issued in the Bondm, Entry Standard, mittelstandsmarkt and m.access segments. After the summer break, several insolvencies led to a clearly more cautious attitude on the part of investors. Even so, the year 2013 saw a total of 33 new issues and EUR 971 million in proceeds for German mid-sized companies. Note that 11 IBOs, i.e. a full third, were not fully placed. Apart from the new issues placed through public offerings, there were also private placements, top-ups and OTC issues. While the 2013 issuance was mainly absorbed by institutional investors, subscribers also included private investors.

Slump – The sectoral breakdown shows that 9 issues came from the property and construction sector, followed by the fashion (5) and renewable energies (5) sectors. The latter is a little surprising, considering that this sector also accounted for the most insolvencies by far. Eight out of the ten issuers who have filed for insolvency since 2010 are active in this sector, which is subject to considerable political influence. This also puts the 10% default ratio in a better light, for the German SME bond sector will not be sustainable if its default ratio remains so significantly above the 3% default ratio offered by high-yield bonds in the USA.

All participants - from issuers to securities markets, from advisors and banks to investors - are challenged to contribute to making SME bonds a success.

There will be further defaults in the future and there will also be cases where a company’s business performance falls short of original expectations. Investors are aware of this risk and can factor it into their decisions. This became evident when an issuer published preliminary financials which fell short of analysts’ estimates - but the bond price rose nevertheless. However, something that is not acceptable is the failure to communicate or the publication of misleading information after an issue. While companies are not obliged to report each and every business event, investors must be able to rely on being advised of important events. A certain issuer who published only a single press release during a whole financial year should not be surprised to see investors becoming suspicious and the bond trading clearly below 100%. It remains to be seen if prosecutions will be brought against the companies which announced a postponement of interest payments because of a planned merger or the publication of preliminary figures for the purpose of topping up an issue shortly before filing for insolvency. Whatever the outcome of these proceedings, such actions have done nothing to bolster public confidence in the transparency of financial communication by SMEs.

Fresh start – So where does the German SME bond market stand three years after its inception? All participants - from issuers to securities markets, from advisors and banks to investors - are challenged to contribute to making SME bonds a success. Germany needs this segment both as a source of alternative funding for SMEs during times of squeezed access to traditional credit due to Basle III and as an addition to investors’ portfolios in times of historically low interest rates. This has meanwhile also been acknowledged in such countries as France and Spain where similar segments are now being created. This presents an opportunity to establish a Europe-wide finance and asset class similar to its long-established counterpart in the USA.