“You are increasingly getting transactions where know-your-customer (KYC) issues pop up at the very beginning, if due diligence is done,” said one Schuldschein investor. “I think they are trying to sell things in order to get them off their books — it’s dodgy tactics.”
A second investor, from a German bank, said something similar, adding that he was worried Schuldschein investors were falling into deals without doing the necessary due diligence.
“Every buyer in the Schuldschein market is supposed to be sophisticated and professional,” he said, “but clearly some are more sophisticated and professional than others.”
Both investors referenced two transactions being marketed as examples of the trend with varying degrees of significance — Schuldscheine for ADO Properties and Agrofert.
ADO Properties, a Baa3 rated company that owns and manages residential properties in Berlin, is seeking five, seven and 10 year notes via Bayern LB, BNP Paribas and HSBC.
“It seems like a straightforward deal but due diligence takes you down a rabbit hole,” said the German bank investor.
The company is 38.2% owned by holding company ADO Group, which is listed in Israel. The chairman of both, Moshe Lahmani, has become embroiled in a scandal through another company he chaired, Shikun & Binui. He was placed under house arrest in July on suspicion of involvement in bribery.
While the leads were marketing the Schuldschein two weeks ago, Moody’s downgraded the company from Baa2 to Baa3, which forced them to cheapen pricing to more attractive terms for investors. However, all ratings are under review for a further downgrade.
In August, ADO postponed a planned eight year benchmark bond deal, due to be led by ABN Amro, Barclays, BNP Paribas, HSBC and Société Générale, which was a factor in the Moody’s decision.
“[The] rating actions reflect ADO’s failure to further diversify its sources of funding and raise the level of unencumbered assets, combined with a more aggressive liquidity management, compared with our expectations,” said Roberto Pozzi, Moody’s lead analyst on ADO.
“The more aggressive liquidity management is also the reason for the review for downgrade. The greater use of commercial paper combined with limited back-up facilities has substantially increased ADO’s funding needs.”
Agrofert, meanwhile, an agricultural and industrial firm from the Czech Republic, entered the Schuldschein market in search of debt one and a half weeks ago.
Citi and Commerzbank are arranging the transaction, offering investors three and five year fixed and floating rate tranches. Pricing ranges are 125bp-145bp over Euriobor and 150bp-170bp over Euribor, respectively.
One investor sent GlobalCapital his own due diligence report on the firm, which referenced the ultimate owner of the firm as Andrej Babis, the prime minister of the Czech Republic.
According to the report: “[In March 2016] the European Anti-Fraud Office has launched an official investigation into the circumstances under which Agrofert, a firm of [Babis], gained EU subsidies worth Ck50m for the project of a luxorious [sic] Stork’s Nest farm. Agrofert… is suspected of having gained the EU money unrightfully.”
Moreover, Transparency International, an anti-corruption non-governmental organisation headquartered in Berlin, has questioned the legitimacy of Agrofert gaining EU subsidies at all while still under Babis.
“The problem is on the European level and concerns everyone. The European Commission has to clearly state whether politicians and their companies can draw EU subsidies. New financial rules are being tightened and this may lead to Agrofert not being able to draw billions in subsidies. Babis would then have to sell Agrofert completely or leave politics,” said David Ondráčka, director of Transparency International Czech Republic, in a statement.
As of December 2017, according to Agrofert’s annual report, Citi had roughly Ck4.97bn ($218.7m) of loans outstanding to Agrofert, while Commerzbank had Ck2.88bn outstanding. ADO Properties has outstanding loans with German banks, but the names of the lenders were not publicly available.
‘Wild conspiracies’
“As to the charge that somehow arrangers are trying to recycle their own bank lending lines into the Schuldschein — that’s just nonsense,” he added.
One investor said “ADO and Agrofert both have problems at an owner level — bribery and fraud around them. The banks want them off the balance sheets.”
But this was uniformly denied and condemned by five Schuldschein arrangers — some who were on the Agrofert and ADO deals, and some who were not.
One said: “This is a critical point: it is very important for arranging banks to have a view that a credit is suitable for the market. Of course, it’s a competitive market and sometimes that [concept] is stretched — but never that far. You are always going to get investors with wild conspiracies about companies they don’t like.
“It is absolutely straightforward that the banks with the closest lending relationships are asked to arrange a company’s [capital markets] activities,” another Schuldschein banker said.
“The fact that a bank is introducing a company to a market [instead of lending it more money itself] is not controversial; a bank may be full on lending limits, or wants to keep balance sheet open for acquisition financing, and it will try to find additional investors for the company. There’s absolutely nothing shady in that.”
Arrangers as gatekeepers
Mid-sized Mittelstand companies began issuing public bonds (with documentation as light as that in the Schuldshchein market) that were directed at retail investors, attracted by the 5%-10% coupon range.
There followed a wave of defaults. By 2015, there had been 26 corporate defaults and four selective bond defaults out of 190 Mittelstand bond issues in the minibond markets of Düsseldorf, Frankfurt and Stuttgart.
But Schuldschein participants were quick to draw distinctions between the two situations.
“[Schuldschein investors] are not retail investors — copy and paste investors — these are professionals,” said one banker.
However another, who was involved in one of the ADO and Agrofert Schuldscheine, urged a little caution. “Sometimes people say the minibond crisis was the investors’ fault because all the information was out there,” he said. “I don’t agree. The arrangers also need to take responsibility for the climate that was created.
“I have never done a transaction where I felt uncomfortable with the credit, ever.”