In the past year Germany's age-old Schuldschein market has been set a-quiver by a flurry of technological innovation. Banks and independent companies have launched a plethora of new electronic platforms, intended to streamline the market and make it more efficient by moving many processes, from deal marketing to bookbuilding, sales and settlement, online.
While each platform — initiatives such as VC Trade and Debtvision — has been hawking its distinctive approach to tackling the market's problems, one platform has been curiously quiet.
Debtdomain, both the oldest and most established platform for Schuldschein issues, ran its first transaction in the Schuldschein market in September 2007. WestLB arranged the deal for Investec and sold the loans to 98 investors.
Last fyear, some 146 Schuldschein deals flowed through Debtdomain — almost every one issued.
“Basically every syndicated corporate Schuldschein goes through Debtdomain, and has done for the last five years," said a Schuldschein banker.
“I don’t remember the last time a Schuldschein investor said he wasn’t registered on Debtdomain,” said another.
Debtdomain is, in short, the platform these plucky challengers aim to usurp.
By GlobalCapital’s count, at least eight Schuldschein platforms have been launched in the past 18 months — all with the intention of simplifying processes in the market. They include CredX, Debtvision, FinPair, FinnestPro, Synd X, VC Trade, Yellowe and Erste Bank’s blockchain platform.
Sean Tai, who founded Debtdomain in 2000, is staggered by this groundswell. “I don’t understand it — I have never seen this before,” he said. “When you’ve got seven or eight new platforms in a fairly niche market in global terms, you have to question how many will be around in a year’s time”.
He is unbothered by the prospect of new competition. “I’m not hugely threatened," he said. "It's like collective suicide… like lemmings off a cliff.”
Sean Tai, Debtdomain
The belief that there are too many challengers is widely held. At Euromoney’s Schuldschein conference in Frankfurt last week, spokespeople from Debtvision, Finpair and VC Trade agreed that many of the platforms would be forced to fold in the next 12 months.
“Where is the money coming from? Are you profitable yet? What’s your longevity here? Where will you pivot to after the Schuldschein? If your head's not above the water you die. Numbers drive everything,” said Tai.
The Schuldschein market is a minuscule part of Debtdomain’s business, less than 1% of revenues, according to Tai. His company mainly handles bank loan syndications, especially in Europe and the US.
“We have 40,000 users on Debtdomain in Germany alone — and 500,000 globally,” said Tai. The user numbers refer to individual people.
In February 2013, bond bookbuilding software firm Ipreo bought Debtdomain, and in the summer of 2018 Ipreo was in turn acquired by IHS Markit for $1.86bn.
Debtdomain now sits in IHS Markit’s Loan Platforms business, which Tai is the managing director of, as well as global head of Debtdomain's business development. But the breadth of Debtdomain’s business, and to a greater extent IHS Markit’s, is precisely why the upstart tech firms in Germany have spotted an opportunity.
Bespoke
The new digital platforms are trying to create a platform bespoke to the Schuldschein market, which serves its needs better than Debtdomain.
The founder of a leading platform said: “The platform that will succeed will have started by asking ‘What are the problems in the Schuldschein market?’ and then find the technology it takes to solve them.”
Despite the ubiquity of Debtdomain, many highly placed people in the Schuldschein market are interested in and support the new platforms.
VC Trade has high profile endorsements, from Helaba’s head of debt capital markets, Andreas Petrie, and a partner at Linklaters in Frankfurt, Neil Weiand. Debtvision is afilliated with Landesbank Baden-Württemberg, the largest Schuldschein arranger last year.
These ventures are intended to handle more tasks in the Schuldschein issuance process than Debtdomain allows.
Debtdomain is used for distributing documents about new issues to the many investors who have registered on the platform. It allows the investor base to be divided up among the arrangers of a deal, so that they can each market to a separate segment. Investors can put in orders over the platform, but a Schuldschein banker said that, although Debtdomain is sometimes used, in practice the banks usually used another Ipreo system called IssueNet to collate and monitor the book.
The process of gathering orders is one of the Schuldschein inefficiencies VC Trade, a leading new digital platform, has homed in on. Up to now, it says, bids have usually been collected over email, by phone or via Debtdomain (among other routes).
Under VC’s software, investors place soft orders and hard orders all via the platform. “What we saw was quite a fragmented [bookbuilding] process,” said Sebastian Glock, co-founder of VC Trade. “With VC you have a one venue approach, a centralised order book with algorithms to allocate.”
This is one of the reasons, another founder of a digital platform said, why blockchain will not have a future in digitalising the Schuldschein market. “Distributed ledger does not solve the Schuldschein’s problems,” he said.
The digital platforms also have ambitions to handle the signing of contracts online.
But Tai does not see value in tailoring a platform simply to suit the Schuldschein market.
“Investors don’t just invest in Schuldscheine — investors are global now, not just in Germany, and they don’t want more than one login," he said. "Arrangers and investors have brought this market way beyond Germany, and the more they do that, the more Debtdomain is very strong.”
There are also digital aspects of Debtdomain the Schuldschein arrangers value, and want other platforms to focus on. One said: “On Debtdomain you can see which investors downloaded documentation, and you can tailor-make which lenders get invited. I appreciate the transparency of investor activity, as well as the platform’s reach.”
“It makes no sense to fragment,” said Tai. “Look at the history of the internet: what’s the ratio of Google searches to other searches — scale returns to those that scale."
Barriers
Tai also believes that technology is not the real barrier for new platforms. “The barrier to entry is less technology and more market access," he said. "The vendor onboarding approval process takes over a year and covers information security, legal compliance, contracts, business continuity, data protection, user entitlement checking, maker checker, auditing and requires massive investments in processes and procedures and specialised staff to address client governance areas.
"The challenge is creating systems to onboard the banks. The amount of compliance is massive.”
BNP Paribas, Commerzbank and UniCredit are three of the largest arranging banks in the Schuldschein market, yet they have not so far committed to any of the new platforms.
When asked whether Debtdomain would consider buying a leading platform, Tai said: “We’d be interested in acquiring anything that’s complementary to our business… but we already do 95% of what they do.”
Another possible outcome is that Debtdomain, with its head start in client onboarding, might build additional functionality to counter any edge the independents might gain through innovation.
"I acknowledge that we can cover the Schuldschein better and we plan to do that by adding features and functionality that is beneficial to both Schuldschein and syndicated loan arrangers and investors," he said. "This includes improving fee tracking, soft orders and allocations. And we can invest in development at a scale that newer [technology] firms could not match."