Actuación surtida ante el Tribunal Contencioso Administrativo, sección cuarta

From a company’s perspective, the issuance of conver - tibles is a particularly attractive alternative when share prices have recently been weak, as this generally means that the conversion price is substantially higher than the market price at the time of issue. This higher conversion price, in turn, lessens the dilution effects on existing share- holders. It should furthermore be noted that the coupon rate on convertibles is invariably lower than that of straight bonds without a conversion feature. Finally, should the bonds be converted to shares, the bonds must no longer be repaid, thus relieving the company of this burden on its liquidity. In this case, the issuance of convertible bonds becomes, in essence, cash now for a future capital increase. Under German law, the issuance of convertible bonds requires that the company’s general assembly of share - holders pass a resolution authorising the issuance of the securities, along with a conditional increase of the com -

pany’s capital. This authority may be granted for a period of no more than five years. The amount of the conditional capital increase, as with other authori - sations for future capital increases, may not exceed one half of the company’s existing share capital (Grundkapital) as of the date of such authorisation. Opportunities for placing convertible bond issues are, to a significant extent, determined by the size of the issue. The smaller an issue, the tougher it beco- mes to place it. Experience shows that EUR 100 mil- lion is the threshold deal size at which convertible bonds can be most effectively placed. In addition to the size of the convertible issue, the liquidity of the underlying shares also plays an important role. Inves tors generally expect to see a certain minimum level of regular exchange trading in the company’s shares so that they can hedge in the market if needed. Finally, the secondary-market liquidity of the convertible bonds themselves is an important consideration because, from an investor’s point of view, this may largely determine how quickly a position can be liquidated.

Summary

The capital markets may appear to be closed right now, but this is only at first glance. A closer look reveals that, despite the difficult present market environment for equity trans actions, straight bond or convertible bond issues present viable alternatives for Mittelstand companies to raise new capital in the public markets.

Deutsches Eigenkapitalforum 2011 Page 53 Photo: Deutsche Börse AG

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Conference Magazine: Mr Kraus, IKB has been involved in

several bond issues from German small and medium sized companies. What is your experience regarding this?

Kraus: From a macro perspective, I believe these new

market segments offer sensible and useful financing alter- natives for the German Mittelstand. As an institution, we have been involved in a number of issues like Katjes or SIAG. A strong brand like Katjes certainly helps in a place- ment, however, it is not a prerequisite for a placement.

Conference Magazine: And what do investors say? Kraus: Investors can be grouped into retail and smaller

institutional investors. At IKB, we do not deal with retail investors, focussing instead on this semi-institutional group. Institutions in particular with a link into the Mittel- stand value the emergent segment and see investment opportunities. Liquidity on the secondary market is certainly one focus area for investors. Sooner or later, we should see some form of designated sponsoring emerging here in order to improve market liquidity. Investors also voiced a demand for research – post-issuance research – which is something that we are looking to address going forward.

Conference Magazine: None of these bond issuance were

particularly large, and they came from a wide range of sectors. What are your prerequisites for support from IKB?

Kraus: For a new issue we need internal clearance from a

number of departments including IKB’s credit department. Each of those departments has a veto right within the pro- cess.

Conference Magazine: What would be the specific

grounds for such a veto?

Kraus: Whilst we cannot predict the future, this process

aims to ensure that we assess a potential issuer from various angels. For example, terms and conditions of a bond should reflect conditions which are already standard practice for high-yield bonds, for example restrictions on dividend distribution or regulations cover - ing the sell-off of company divisions. An issuer aiming to raise money in the capital markets should think about offering such covenants and in doing so signals that it is prepared to be governed by accepted capital market provisions.

Conference Magazine: The covenants differed widely

between the various bond offerings; as yet, little appears to be stan dardised.

Kraus: True, and for that very reason, I believe there are

some risks for investors here. We at IKB are therefore trying to help standardizing and elevating the quality of documen- tation and covenant templates.

Conference Magazine: What is your role in the selection of

the market segment? Do you give specific advice on the direction to take?

Kraus: We merely advise on what would be a good choice

for the issuer in the light of all key factors. At the end of the day, the issuer needs to take the final decision. The require- ments of individual exchanges such as Stuttgart, Frankfurt and Düsseldorf do differ in some respects. Key parameters include amongst others regional considerations, the struc- ture of the bond and the target size.

Conference Magazine: What is your assessment of the

current market for SME bonds? – Around three quarters of prices are under par at the moment.

Kraus: Falls in prices were not limited to SME bonds: high

yield bonds and leveraged loans have seen similar falls in price. Also, price movements are similar for bonds issued in different markets but by companies in a similar sector such as the solar industry where Centrosolar and Solarworld Bonds are traded in different market segments. In some

“Helping bond issuers be ‘fit’ for accessing the

capital markets”

Interview with Tilo Kraus, Head of Capital Markets &