The Schuldschein market has been a maelstrom of technological innovation in the past year or two, as bank dealers and technology companies have been vying with each other to launch electronic platforms to streamline the market’s processes.
Until now, many investors have been reluctant to use them, or half-hearted at best. Many find them a nuisance and of little benefit.
To tackle these objections, VC Trade and the banks that back it (BayernLB and Helaba) wanted to offer a must-have deal exclusively on the platform. Lufthansa, the German national airline which is one of the market’s favourite borrowers, was an ideal candidate. The parties agreed to try it.
Some in the market felt accepting bids on VC Trade only was a high risk tactic for Lufthansa, as many Schuldschein investors had not yet signed up to use the platform. But it succeeded.
“We didn’t anticipate the transaction would be that successful, but in the end it worked very, very well,” said Sebastian Glock, co-founder of VC Trade.
Investors had been warned something was afoot. In a rare example of soft-sounding in the Schuldschein market, Helaba (arranger of the deal, with BayernLB) emailed investors on Friday March 8, saying: “We are planning to launch new SSDs for a Dax company and other benchmark transactions as early as next week. These will be marketed — particularly at the request of individual borrowers — exclusively via www.vc-trade.de.”
The email offered a link to access and register on VC Trade.
On the following Monday the deal for Baa3/BBB-/BBB- rated Lufthansa was launched.
BayernLB and Helaba started with a target of €300m, offering investors three and five year tenors, only via VC Trade. Pricing ranges were 65bp-80bp and 85bp-100bp over Euribor.
The initial target was soon surpassed. “We saw the order book grow very fast and pass €1bn,” said Glock.
VC Trade was launched last May and backed by major Schuldschein banks, including BayernLB and Helaba (the top two arrangers so far this year). Before the Lufthansa launch, roughly €3bn-€4bn of Schuldschein deal volume had run through VC Trade and roughly 300 investors had registered.
A Schuldschein veteran, from a bank yet to participate in a transaction through VC Trade, said: “VC Trade has the technology sorted; what it needs is the investor base to use it. If it takes them selling Lufthansa exclusively on their platform, then fair enough.”
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.
Under its software — which is intended to carry a transaction from origination to expiry — investors place soft orders and hard orders, all via the platform.
“What we saw was quite a fragmented [bookbuilding] process,” said Glock. “With VC you have a one-venue approach, a centralised order book with algorithms to allocate.”
Mixed lenders
GlobalCapital interviewed several investors about Lufthansa using the digital platform exclusively. The response was mixed.
Some complained in strong terms: “Why on earth do we have to subscribe to this new platform — why can’t we just email and speak on the phone? Where is the added value? I just see this as marketing for Lufthansa and VC Trade,” said one investor at a German co-operative bank.
Another lender, from a commercial bank, said: “We will sign up to a tech platform if they offer us a trade like Lufthansa exclusively. But we won’t be happy about it.”
But others were interested in the arrangement. “There are loads of inefficiencies in the market and they need to be solved — and VC has done a good job of solving them,” said one lender at a European commercial bank.
A German investor, keen on technology, who had subscribed to VC Trade a while ago, said of the critical investors: “You will always get this with innovation. People are used to the old ways, and it takes a while for them to adapt. Trust me, they will all get used to it.”
The complaints, however, soon subsided.
“We had over €1bn of orders from hundreds of investors,” said a banker on the deal. “There were only a very few investors that didn't participate.”
The €800m deal is the largest Schuldschein transaction so far this year.
“We weren’t expecting such a large deal,” said a banker away from the deal. “Hats off to Lufthansa and VC Trade, they made the right choice. This is a game changer in the digital debate.”
The new normal?
Well-rated, frequent Schuldschein issuers may be the most likely to launch transactions exclusively via technology platforms in the near future.
According to several market participants, car companies such as Daimler, Porsche and Volkswagen are being wooed to issue deals like Lufthansa’s by certain technology platforms. These issuers are the best known to investors, which means the marketing process can be less intensive than it would be for a Schuldschein debutant or smaller borrower.
“There are two reasons issuers would be drawn to exclusive deals with technology platforms: it may be cheaper in terms of fees, and it’s great for marketing,” said an arranger.
Several tech platforms have been vying for dominance in the Schuldschein market.
Seven are promoted by banks — VC Trade; LBBW’s Debtvision, in partnership with the Stuttgart Stock Exchange; HSBC’s Synd-X; Raiffeisen Bank International’s Yellowe; NordLB’s Finpair; and blockchain platforms launched by both BBVA and Erste Bank.
Another two platforms are from fintech companies CredX and FinnestPro.
The platforms championed by the Landesbanks, Debtvision and VC Trade, are expected to be most successful. However, VC Trade has demonstrated its capacity to be open to arrangers and investors.
“The Lufthansa trade for us proves that we were right about being an open platform,” said Glock. “If you are an open platform, you will draw in all the participants, and if you do that you succeed.”