Do Family Firm Mittelstandsanleihen (convertible bonds) perform better?

Seminar Paper 2014 27 Pages

Business economics - Investment and Finance


Table of Contents

1. Introduction

2. Family Firms
2.1 Definition
2.2 Economic Relevance and Characteristics

3. German Mittelstand
3.1 Definition

4. Corporate Bonds
4.1 Conceptual Insights
4.2 SMEs and Corporate Bonds
4.3 Drivers of Performance and Risks

5. Performance Analysis
5.1 Assumptions and Methodology
5.2 Review of the Result
5.3 Assessment of the Results’ Robustness
5.4 Summary

6. Discussion of the Result and Critical Appraisal

7. Conclusion



Figure 1: Performance Risks


Table 1: Features of FOBs

Table 2: Total Returns 2011 non-adjusted

Table 3: Overview Results 2011/2012

Table 4: Average Capital Gain/Loss


Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

It is quite popular saying that family firms or family-owned businesses (FOB) are more moderate entities, which are generally more stable due to direct shareholder influence. Besides profit orientation, the securing of an on-going business without taking high risks is seen as a major attribute (Stiftung Familienunternehmen 2011a, p. 10). The result of a study conducted by the “Stiftung Familienunternehmen” in 2009 showed that the crisis susceptibility of FOBs was quite gentle due to a long-term liquidity planning and relatively low debt-equity ratios (Stiftung Familienunternehmen 2009, pp. 15-16). Nevertheless family firms as a subcategory of business entities are very heterogynous in size, age, shareholder influence, financing etc., which makes it difficult to draw general conclusions (Stiftung Familienunternehmen 2011a, p. 186). Despite of the fact that the public interest in FOBs has risen in the past years, scientific research is still on a non-sufficient level (Bundesverband der Deutschen Industrie 2013, p. 7). The present assignment therefore aims to contribute to the current status of research especially in the field of finance of small-and-medium-sized enterprises (SME). As an alternative to bank loans, several SMEs have accessed regulated bond markets since 2010 for financing their business. Coming back to the commonly stated attributes of FOBs, now the following three questions arise:

-Question I: Which characteristics of SME family firms could potentially lead to an outperforming development of their issued debt instruments?  Question II (Central Question): Have Family Firm Mittelstandsanleihen performed better so far in the perspective of investors/creditors?  Question III: Could it be concluded that investors are generally well advised to rather invest in SME corporate bonds than in non-family firm bonds?

On the next pages the term family firms, their economic weight, as well as the term German Mittelstand will be explained. In this context the potential superior characteristics of FOBs are presented. Afterwards, a short introduction into the concept of corporate bonds is made to give background knowledge about this kind of debt instrument. After this part the assignment provides insights in the methodology of a performance study that has been conducted by the author on the most relevant German bond exchange markets in order to answer the central question and to give advice to potential bond investors. In the end, the result is tested with regard to robustness and also appreciated in a critical manner.

2. Family Firms

2.1 Definition

When talking about family firms, the prevalent sentiment is, that they are small or mid-sized companies that stick to their original family values and traditions. Being risk- averse and conservative, the companies are led by the family patriarch or his/her successor. Furthermore the firms are said to be long-term oriented and therefore quite stable in their operational success (May 2012, p. 14). But nevertheless the reality shows that the stereotypes do not always apply. The confectioner Haribo or the famous sport brands Puma and Adidas are just a few examples of companies that have evolved to big enterprises on the one side, but have been faced with challenges and tensions within the families on the other side (Handelsblatt 2013, p. 1).

Due to the complexity of potential attributes, the scholars have not brought out a general definition of family firms so far. Prior to the performance comparison, an approach for the identification of family firms is needed. Thus, this assignment makes use of the operational distinction delivered by the European Commission in 2009. According to the expert group on family business, FOBs can be defined as entities that:

-Grant indirect and direct major decision rights to the direct family, close kin or the person that has acquired the company (Control Perspective) - At least one member of the prior mentioned groups is involved in the governance of the enterprise

Listed companies fulfil these criteria as long as the founder or acquirer - respectively their families or successors - owns at least 25 % of the share capital whereas for non-listed companies the threshold 50 + x % is set (European Commission 2009, p. 10).

2.2 Economic Relevance and Characteristics

The central question of this assignment deals with the performance of SME corporate bonds from an investors’ point of view. Without making reference to an empirical proof, it is expected that FOBs bonds perform better than non-FOBs bonds due to their issuers’ special features e.g. conservative funding (Ampenberger et al. 2013, p. 271). After justifying the potential interest with the high relevancy in the German economic system, this section aims to give potential reasons for the expected difference. However, as a first step the following attributes will only target potential differences in the operational and financial performance of the companies themselves. The connection to bond performance and the explanation of typical drivers will be expounded in later in section 4.3.

Family firms as the oldest form of economic activities are widely represented in Germany. About 9 out of 10 businesses are managed by families (Stiftung Familienunternehmen 2011b, p. 3). FOBs employ more than 50 % of the German workforce (excluding the public sector) and generate nearly 50 % of total revenues made by German firms. This minor quantitative impact in revenue is due to a high number of very small family firms. Nevertheless they are the prevalent organisational form in Germany (Stiftung Familienunternehmen 2011b, pp. 46-47). Volkswagen, Metro, BMW, the Otto Group and the Schwarz Group are just a small couple of examples of such leading FOBs (Institut für Familienunternehmen 2012, p. 1).

The prejudice of a limited chance of continuality - caused by changing owner generations within the family - existed until not so long ago. The separation of ownership and control was held as the solution to this problem, as the reason for the Industrial Revolution and thus generally the source of higher efficiency in operations (May 2012, p. 15). The second half of the first 21st century brought out a changed view. The stability and endurance of concentrated ownership and control combined with the feature long-term orientation, was appreciated especially after the financial crises (Hamburger Institut für Familienunternehmen and Handelskammer Hamburg 2013, pp. 26-27).

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Features of FOBs1

Therefore Table 1 gives an overview about the common features and their amplitude either in the positive or negative direction. The central point is clearly the above-mentioned linkage of ownership and control, which potentially decreases costs that occur when wealth is managed separately due to conflicts of interest. Moreover the points continuity, flexibility and stability will be of special interest with regard to the response to the central question. As it is plainly shown in the table, FOBs face severe challenges on the other hand. For example, a strong family leading the business sustainably, has to make sure his succession; a process that is highly relevant for an on-going success and that is filled with a lot of potential for severe family conflicts. Understanding the potential of this organisational form but nevertheless not neglecting likely problems is crucial for the discussion about a better performance of family firms (Rhodes and Lansky 2013, pp. 25-49). It is obvious that the ability to deal which potential challenges differs among FOBs, which in return makes it more difficult to generalise patterns of behaviour and performance. The plain theory cannot answer this question, but provides possible factors. The results of the empirical performance benchmark in section 5 are expected to enrich previous insights with information from the market.

3. German Mittelstand

3.1 Definition

As the assignment refers to economic activities in the German Mittelstand a brief explanation is given in this section. The Mittelstand or in other words SMEs play a significant role in the German economy. About 99 % of all German companies belong to this classification and make up 37 % of total revenues (Bundesministerium für Wirtschaft und Technologie 2013, p 3). Usually the term is linked to a classification with the help of figures (Becker, Ulrich, Zimmermann 2013, p. 8). Widely used is the definition by the European Commission according to which firms count as an SME when (European Commission 2013):

-Less than 250 people are employed in the firm
-Annual revenue does not exceed MEUR 50
-or: balance sheet total is at the most MEUR 43

Nevertheless a pure quantitative definition often fails to correctly integrate all “true” SMEs. Confusion also exists on the reference markets for Mittelstandsanleihen in Germany (Corporate bonds issued by SMEs). For example, the company Air Berlin PLC accounted a balance sheet total of about two billion EUR, a revenue of MEUR 761,8 and 8.694 employees in the first quarter of 2014 (Air Berlin 2014a, p. 2). Neither of the European Commission

criteria is fulfilled, whereas the corporate bond of Air Berlin is listed in the segment Mittelstandsanleihen. However, in order to establish a clear and reliable basis for the further assessment, this assignment assumes that all companies listed as SMEs in German bond exchanges, belong to this classification. To sum up SME is a classification primarily and simply by size. FOB is a categorization with regard to the nature of the company. An entity does not necessarily belong to both.

4. Corporate Bonds

Before going in the analysis of bond performance in order to conduct, evaluate and discuss the study, this section will give basic information about corporate bonds as an investment possibility and on the other side as a source for financing. Furthermore it is explained why corporate bonds as a financial innovation (Mayer Friedrich and Schnier 2012, p. 42) currently attract SME companies on the issuer side. In the wrap-up of this section the perspective is changed back to the investor. With reference to the comparative evaluation of bond performance, parameters for performance as well as the applied definition for performance will be presented.

4.1 Conceptual Insights

In its plain form a bond is a debt instrument that corresponds to an obligation of the issuer (initial seller) to pay a back a certain amount of money (face value or principal) after a certain time period; also called maturity. Between the issuing date and the maturity, the lender (buyer of the security) typically receives fixed payments on designated dates from the borrower (coupon payments). These mostly annual income streams equal a fixed percentage of the face value, which is called the nominal interest (Fabozzi and Mann 2005, p. 305). The issuer can either be a government, an agency or a corporation. When a corporation raises debt (normally long-term debt) in form of a bond, the term corporate bond is used. To be more specific, the German word Mittelstandsanleihen is further used for corporate bonds issued by SMEs. As this is the debt instrument the central question of this assignment refers to, one might ask: What is the difference of a bond to a simple bank loan?

A bond as a liquid form of a loan can be traded on the secondary market. The total issue amount (credit amount needed) is sliced into a great number of small bonds and thus accessible for a wide range of investors. The first buyer or initial beneficiary does not necessarily have to hold the bond until the maturity date. The bond could technically be liquidated by reselling it to a new bondholder, who takes over the role as a beneficiary from the reseller (Mobius 2012, p. 4). Different to a loan, the lending party is usually not a bank, but a participant of the capital market such as institutional investors or individuals (Mobius 2012, p. 57).

From an investor’s perspective it has to be pointed out that an investment into a bond has to be distinguished strictly from the provision of equity or the acquisition of companies’ shares. Commonly, investors are not granted with any voting or direct control rights, but they rank higher than stockholders in case of an insolvency of the borrower. Briefly speaking, after the liquidation of the companies’ assets, their claims (outstanding coupon payments and the principal) get settled prior to the claims of the stockholders (Mobius 2012, p. 57). Anyhow, this priority does not fully protect the investor from a financial loss. Among other things, the lending party is exposed to the risk that the business does not generate cash flows sufficient for the company’s obligations (Fabozzi and Mann 2005, p. 305). Finally, bonds can differ in their collateralisation. The clear majority of Mittelstandsanleihen is unsecured and thus not backed up with any assets (Finance Magazin 2014). Other risks that investors might face while holding a bond will be introduced briefly in section 4.3.

4.2 SMEs and Corporate Bonds

The past years have shown that SMEs diversify their financing towards capital markets with the help of corporate bonds (Finance-Studien 2011, p. 4). Since the year 2010, regulated markets in Frankfurt (Entry Standard), Stuttgart (BondM), Düsseldorf (der mittelstandsmarkt), Hamburg-Hannover (Mittelstandsbörse Deutschland) and Munich (m:access) have developed for this particular segment. The Frankfurt Entry Standard and the BondM thereby make up more than 80 % of all emissions. There are numerous reasons why 106 bonds have already been issued on these markets with a nominal volume of 4,92 billion Euro until the end of 2013 (Creditreform 2014, p. 10; p. 13). Harald Kinateder from the university of Passau works out major reasons for this steady development in his journal article from April 2013 (Kinateder 2013, p. 194):

-Tightened loan availability from banks due to their stricter capital requirements according to Basel III
-SME’s attitude against control that could be solved with bonds


1May 2013, p. 51.; Kromschröder 2013, p. 16.; Ampenberger et al. 2013, p. 271.


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family firm mittelstandsanleihen



Title: Do Family Firm Mittelstandsanleihen (convertible bonds) perform better?