The funding teams of an obscure ex-Soviet supranational development bank and Europe’s biggest car maker were poring over rather similar legal documents in late February. International Investment Bank and Volkswagen Financial Services were both bidding for investors in a venerable German debt market.
The week before, a Polish fast food chain, a Czech phone operator, an Austrian hydraulics firm and a Luxembourg airline also paid trips to the Schuldschein market.
What is it about this once stuffy market that is attracting such an unlikely troupe of fellow travellers?
The Schuldscheindarlehen — sometimes translated as promissory loan note — reflects the German industry it has historically served.
Issuance and pricing are commonly kept confidential, reflecting the private habits of the solid, unlisted German companies of medium size that traditionally have been its main customers.
The instrument is frequently offered at unusual (but useful) maturities that public bond markets and syndicated loans cannot reach. In legal terms, the Schuldschein has a bilateral character — as many as 500 investors can be involved in a transaction, each having a separate relationship with the issuer.
Recently, though, the Schuldschein has drawn issuers and investors from beyond Germany’s borders. Since 2013, when there was €9bn of Schuldschein issuance, by Helaba estimates, market volume has increased every year. Its record of €20bn in 2015 was beaten again last year, as issuance in 2016 reached €26bn.
International competition
International deals swelled that total, with almost half the transactions, by both volume and number, originating outside Germany.
A strong domestic following for the product remains. Investment in the traditional style of Schuldschein deals from German issuers is dominated by Sparkassen (savings banks), cooperative banks, public banks and insurance companies.
The depth of the relationships between issuer and investor often mean that new investors, less confident of the borrower’s credit quality, are priced out.
But these heartland investors are less confident with foreign borrowers, or in many cases do not have a mandate to lend to them.
“The German savings banks have lost ground to international banks when it comes to investing in the larger non-German corporates,” says ING’s head of Schuldschein, Klaus Pahle, in Frankfurt.
International investors have entered the Schuldschein market in parallel with foreign issuers, lending to borrowers that the Sparkassen have not been prepared to touch.
“The large numbers of international issuers and investors create their own synergy — it is, if you like, a self-enforcing cycle,” says Helaba’s head of primary markets, Andreas Petrie, in Frankfurt.
As an example, at BNP Paribas, some 70% of the Schuldschein paper it distributed in 2016 went to foreign investors.
“There is a growing diversity of sectors and geographies in the international areas of the market, and a growing willingness of investors to take those credits,” says Richard Waddington, head of loan sales at Commerzbank in London.
There were 60 international Schuldschein issues n 2016, and that figure looks set to rise this year.
Finding strength in numbers
“Other private placement markets are driven by fewer investors with bigger tickets,” says Raoul Hessling, BNPP’s Schuldschein specialist in Frankfurt.
The Schuldschein format, which is flexible as to tenor, currency and fixed or floating rate interest, attracts a wide range of investors, which drives down pricing for the issuers.
French firms like Orpéa and Groupe SEB, which have a local source of private debt in the Euro private placement market, issued large Schuldschein deals last year instead. This was partly due to the product’s favourable pricing, and partly as the Euro PP might struggle to cope with issuance sizes above €200m.
These larger deals have been the main drivers of the high Schuldschein issuance over the last two years. But the number of deals is also rising: last year there were 135, a quarter more than in 2015.
Looking ahead to 2017, Petrie says: “Market volume will depend on M&A activity, as corporates are flush with liquidity, also on whether other market segments are functioning properly.”
Some deals are driven by large, rated issuers turning to the Schuldschein market when public bond markets are volatile.
“The Schuldschein has reached a stage where it has become the prevailing European market for private debt,” says Pahle.
And as International Investment Bank’s recent arrival shows, the Schuldschein market’s appetite for unusual credits is thriving.