Schuldschein expands eastward in a digital age

The Schuldschein market is widening its circle of issuers and investors. It is now a natural choice for Austrian companies wanting to complement bank funding, but not necessarily big enough to issue public bonds. 

Vienna is also often the interface between the Schuldschein market and central and eastern Europe. Investors are interested in CEE, because of its economic growth, and dealflow is accelerating. The market reaches further still — Reliance Industries has brought the first deal from India. For some investors, the need for an implied investment grade rating is a barrier — but the growing diversity of the Schuldschein investor base is helping. Occasionally deals are done entirely without German investors.

The Schuldschein’s bilateral legal structure remains, for now, an unalterable feature that participants must live with. But changes are happening in administration, with rival digital platforms looking to speed things up. GlobalCapital gathered issuers, investment banks and investors to discuss the perspective on private debt from Vienna.

Participants in the roundtable were:

Louai Al-Jaafari, director, Raiffeisen Bank International

Morris Gutermann, director, primary markets, Helaba

Maximilian Hagendorff, associate director, debt capital markets origination, UniCredit

Dávid Lustyik, team leader, corporate banking division, KDB Bank Europe

Stefan Ondra, deputy head, group treasury, Porr

Dominic Walch, head of group treasury, Fritz Egger

Felix Warmuth, group treasurer, RHI Magnesita

Silas Brown, loans and private debt editor, GlobalCapital (moderator)

GlobalCapital: As we’re in Vienna, perhaps we should begin here — what, in your experience, attracts borrowers from Austria and central and eastern Europe to the market?

Louai Al-Jaafari, Raiffeisen Bank International: It’s easy to say that language itself is the most attractive aspect. Before 2012, the Austrian borrowers used to issue Schuldscheine via an SPV outside the country, because that meant a change in the stamp duty. 

But that changed at the end of 2011, and all of a sudden Austrian blue chips found this funding instrument. Since then, Austria has become the second ranking country of origin for issuers, after Germany itself. 

These borrowers, from Austria and central and eastern Europe, are the blue chips of each country. In 2013 we did the Ministry of Finance of Bulgaria, and we closed the third Czech corporate transaction of the year last week. 

Lenders are looking to diversify their investments away from Germany, so you find a receptive audience.

GlobalCapital: Felix, you’ve issued repeatedly in the Schuldschein market. Why have you found such a home there?

Felix Warmuth, RHI Magnesita: The main benefit is diversity in one’s funding portfolio, in addition to funding through the banking markets and public markets. As Louai rightly mentioned, the fact that a lot of Austrian borrowers have ties to Germany also plays a big role. A large number of Austrian corporates have exports to, as well as production in, Germany, among other things, which gives them a natural tie to Germany, and therefore also to the German investor base.

Dominic Walch, Fritz Egger: We generally use the capital markets to diversify our investor base. Until 2012 we were heavily using the Austrian retail bond market, but that isn’t there anymore, at least in the format it was in in the past. 

The Schuldschein gives us a lot of flexibility in structures, fixed or floating, in maturity and volume, as well as investor diversification. 

But also, in the current environment, the Schuldschein is an economically attractive instrument compared with other ways of raising debt, especially for us as an unrated corporate. We certainly wouldn’t tap the Schuldschein market as much if it wasn’t so economically attractive for us — we would focus on other instruments.

Stefan Ondra, Porr: For us, its main advantage is its flexibility in tranches and volume. Typical Austrian corporates are not looking for €1bn at once, they are looking for small placements.

Warmuth, RHI Magnesita: The market also gives you flexibility on tenor, importantly — you can choose three, five, seven, eight, or even 10 years.

Walch, Fritz Egger: And it gives you the flexibility to redeem earlier if you so wish.

GlobalCapital: From the investor side, Dávid, are you comfortable in participating in all tranches? Why are you interested in what the market has to offer?

Dávid Lustyik, KDB Bank: We are a conservative bank and we prefer shorter tenors, mostly three years, but issuers don’t want that at the moment. 

We choose floating tranches only, as we don’t want to deal with any hedging. The big advantage for us in the Schuldschein market is that, as a small investor, we can lend only €5m or €10m. In a syndicated loan that is not really possible. The Schuldschein market therefore allows our size to be aligned with our ticket sizes.

Al-Jaafari, RBI: Usually the revolving credit facility in the loan market is the entry ticket for any lender seeking a relationship with a corporate, but in the Schuldschein market the vast majority of Schuldschein investors are not seeking a relationship. It’s convenient for a borrower not to have to deal with lenders looking for more ancillary business. Of course there are some lenders that think a Schuldschein investment is an entry ticket.

GlobalCapital: When you speak to Schuldschein investors do you hear them speak in those terms, regarding relationships?

Maximilian Hagendorff, UniCredit: Absolutely, from time to time, especially the commercial banks, which ask for bilateral calls with the issuers, and want to show their expertise in certain fields. But I think most issuers are sensitive to opening up new relationships, and will only do so if it makes sense.

Morris Gutermann, Helaba: Let me echo what Maximilian said. It’s part of our job as arrangers to manage the Schuldschein transaction in such a way as to strike a proper balance between the issuer and the investor, and sometimes keeping the issuers away from the investors. We sometimes have to be clear with investors that they are participating in the Schuldschein only in the terms as stated. But other times, we need to facilitate bilateral conversations between the two, especially for investors with the bigger tickets. It’s about striking the balance.

GlobalCapital: Back to the central, initial question. Beyond the German-speaking region, the key sources of growth for the market so far have been the Nordic countries and the French-speaking region. Do you think central and eastern Europe will be an important source of growth in future? What are the main impediments to growth?

Gutermann, Helaba: Those are very important questions. With the Nordics, that was ground zero for the international Schuldschein. Before 2005 or 2006 there was no international Schuldschein to speak of, apart from the odd Austrian or Swiss borrower. But we forayed into Norway and Finland back then, and found a very receptive audience. When you offered those borrowers diversification, with a product that fits medium term needs with competitive pricing, it was like pushing at an open door. Central and eastern Europe is up and coming in the market, especially Poland, the Czech Republic and Hungary. But the main impediment to further growth is that the Schuldschein remains a conservative market. The investors are somewhat provincially minded, and we need to move at their pace.

Al-Jaafari, RBI: It is true that German investors are the base investors. However, new international investors are participating too. Without them, you wouldn’t see such oversubscribed transactions. I’m speaking mostly about Asian investors, who should always be in mind for transactions that reach €300m and above. For volume, you need the Bank of China, ICBC etc. They can provide the necessary commitments for a benchmark facility. When they say they are coming, they are coming.

Hagendorff, UniCredit: I’d follow on from that. The more international the issuer, the more international the investors. The base investors are still from Germany but if an international borrower requires size, it will come from international investors. Looking at it the other way, what prohibits more and more international issuers from entering the market? An implied investment grade is certainly a positive precondition.

Al-Jaafari, RBI: We have closed three transactions from the Czech Republic: CPI Property, jointly with UniCredit; O₂ Czech and EP Infrastructure. Without the international investor base, the launch targets would not have been met.

GlobalCapital: Dávid, do you have country limits preventing you from investing in certain transactions?

Lustyik, KDB Bank: At the baseline, we need an investment grade rating. We can’t ignore the CEE region because of its strong economic performance. But in some countries in the CEE region we, as a Hungarian investor, for tax purposes are not welcome, namely Bulgaria, Poland and Romania. 

Louai just mentioned three transactions — we took two and our partners in London took the other. 

However, there may be some obstacles regarding taxation. Many countries impose withholding tax, and although they have double tax treaties, such treaties may not always reduce the withholding tax to zero.

GlobalCapital: One of the more extraordinary transactions this year has been from the Indian conglomerate Reliance Industries. Some investors were concerned about withholding tax implications with that borrower.

Lustyik, KDB Bank: We would have been very happy to participate in that transaction, but our network already has a huge exposure to that credit, so we could not participate. We didn’t get to the withholding tax, but I’m not sure how ready the borrower would be to pay additional gross-up amounts.

GlobalCapital: Morris, Helaba has very close ties with Asian investors — what are your thoughts on the prospects of growth in Asia?

Gutermann, Helaba: We have indeed been very active in Asia, on sales and syndications, acquiring investors in places we weren’t even aware they would be. 

We cover all the banks in Taiwan, for example, which is an amazing thing if you think about it. We’ve done two tours throughout Asia, from Singapore right up to Tokyo, with basically everybody in the banking industry present and very receptive to the offering. In both cases we had Lufthansa accompany us, and after the Asia trip they did over €1bn in the Schuldschein market. 

On the borrower side, there are very strong names in Japan and China, and nothing prevents them from accessing the market, apart from their own funding needs and comfort with the product.

Al-Jaafari, RBI: When the Reliance transaction was launched, I thought about the German savings banks. They have certain principles about whether they can participate out of their region, out of their country, out of Europe etc. Nevertheless, for an Asian borrower, you would ask the savings banks but also Asian investors, who may already have heavy exposure to the credit in their country of origin. 

Gutermann, Helaba: That’s a very interesting point. We try to manage the Schuldschein in a traditional way, with a healthy mix of local and international lenders. But sometimes, if the Sparkassen aren’t there yet, it is entirely possible to bypass the traditional lenders, and you can get an international borrower purely financed by international lenders. This is quite amazing in itself.

GlobalCapital: It would be a curious thing to have an Asian borrower using a German product to sell to Asian investors. I suppose that could disrupt the diversification angle?

Gutermann, Helaba: Diversification should always be a strong selling point in the Schuldschein market. If an Asian issuer keeps seeing the same names pop up in every order book, that would be a problem. However, the one thing that mitigates this is that there are different buckets in different institutions.

Hagendorff, UniCredit: But an Asian borrower might well provoke a sort of reverse diversification. The Schuldschein attracts Asian and Middle Eastern investors buying European credit. But if an Asian borrower taps the market, maybe the European commercial banks would be interested, in order to diversify their credit portfolios.

GlobalCapital: In terms of UniCredit’s origination, in which regions do you see the most potential for growth?

Hagendorff, UniCredit: It’s really about the credit quality of the issuer as opposed to the country of origin. Why shouldn’t a US borrower fund via the Schuldschein market if there’s a structural advantage for it? I wouldn’t rule out issuers from CEE or Asia, but the product itself needs to be suitable for the company.

GlobalCapital: Turning to issuers, I’m interested to know where the Schuldschein fits in your funding strategies. Stefan?

Ondra, Porr: We had a similar strategy to Egger until 2012 and 2013 — we tapped the Austrian retail bond market. But this time has gone, unfortunately. 

Right now the Schuldschein is complementary to our usual sources of funding, but it is our main source of long term debt. And by way of example of what Morris was saying, our first Schuldschein, in 2015, was sold purely to Asian investors.

GlobalCapital: Is the Schuldschein destined to be a complementary instrument to other more mainstream forms of debt?

Walch, Fritz Egger: That’s how we see it, as a complement, primarily to our core banking group, which provides syndicated loans. For diversification away from that, the only viable and sensible option for us is the Schuldschein market. 

We would consider Eurobonds in the future, but we are not there yet, in terms of size. We had a look at US private placements, and they may become more important, as we are currently in the construction phase of a plant in the United States.

Warmuth, RHI Magnesita: We had a look at US private placements too, but we decided not to because of the covenant structure. It does have an advantage when it comes to tenors, but it is way stricter on covenants. When deciding on a financing instrument you have to look at all pros and cons — also the Schuldschein market has its cons, like the fact that you could have 60 or 70 investors and you don’t have a majority clause in the Schuldschein documentation

GlobalCapital: The bilateral nature of the Schuldschein is an essential part of the instrument, constituted under the German Civil Code. Morris, should that change, to allow for investors to have majority voting clauses?

Gutermann, Helaba: The bilateral nature of the loan is inherent in German law. When you hear a headline number, like a company has raised a €500m Schuldschein, that’s fictitious — in fact it breaks down into however many smaller bilateral loans with however many investors. 

This is the legal reality we find ourselves in. So what happens? It’s a give and take. The Schuldschein market should really only attract the investment grade corporate world, there should be a self-selection going on. 

As soon as you deviate from the investment grade world, you have to bring in factors like covenants, which detract from the marketable nature of the product. 

Let me give you an anecdote from a client recently. They added an unusual covenant, a gearing covenant, which I remember from my student days as debt over equity. This is quite rare for the Schuldschein market, but we thought it wasn’t a problem when we handled their documentation, seeing as they had it in their RCF. 

However, they then wanted to change it later to a standard leverage covenant, and those same investors, that weren’t even really aware of the gearing covenant, all of a sudden had a problem with the leverage covenant. 

This is when you run into trouble dealing with 70 or 80 investors. The best course of action is to keep the issuer group at investment grade, a stable issuer profile which doesn’t require covenants.

Hagendorff, UniCredit: Back to your question regarding Nordic issuers, do they go for the Schuldschein just because of lean documentation? Obviously not. The instrument is beneficial to them in terms of flexibility in size and tenor, this is why they’re tapping the market.

GlobalCapital: As an investor, Dávid, would you want more covenants?

Lustyik, KDB Bank: Personally I’m not covenant-mad, but I do prefer them. Because we are a conservative bank, the existence of covenants gives us a certain level of comfort that the borrower will not do anything mad during the life of the loan. 

But though we are conservative, we are not trigger-happy. Our bank participated in the corporate restructuring during the Asian crisis, and we don’t want to destroy anybody because of a covenant breach. We just have to investigate how situations can be sorted out. But when covenant-lite structures came out in the Schuldschein market a few years ago, I was quite shocked.

Al-Jaafari, RBI: Since Landesbanks are always leading the major transactions, this gives the savings banks in Germany major comfort to participate. This may be why the covenant-lite structures started to pick up. When the economy was growing and competition was heavy between arrangers, promising light covenant packages became a way of winning mandates. 

But the comparisons between the Schuldschein and US PP instruments really should emphasise one thing — the investors. Investors in the US are sophisticated, they need higher requirements to participate.

GlobalCapital: What would investors in Austria like to see more of in the Schuldschein market?

Al-Jaafari, RBI: You are talking about 25 or 30 investors in Austria. You could say that liquidity costs are higher in Austria, as there are fewer investors. Austrian blue chips can easily place a transaction with German investors — that’s why Austria is a fertile ground for German Landesbanks to play in.

The Austrian investors are price-sensitive and request a floor. A Schuldschein with tight pricing without a floor is very challenging for them. However, they’ll still try as much as possible to participate. 

Walch, Fritz Egger: Besides spreads, in our experience all investors are now taking a closer look at documentation, to make sure there is nothing crazy in it. They basically take a closer look at the credit.

Hagendorff, UniCredit: What I find very interesting is that if you look at the order books of Austrian borrowers, their core relationship banks often participate. Despite challenging spread levels, the core banks still support these transactions.

Walch, Fritz Egger: Not for us because we try to keep limits open to other investors.

Warmuth, RHI Magnesita: Are Austrian investors participating in non-Austrian Schuldscheine?

Hagendorff, UniCredit: Selectively, yes.

Al-Jaafari, RBI: Some of them participate in French transactions, some in Swiss. With German issuers, they can always participate, though those transactions are getting very tight. We see some Austrian investors participating in the CEE trades too. Spread levels are higher for these transactions, so that helps bring the Austrian investors in.

Ondra, Porr: If you look at the total quantity of investors in Austria, as Louai said, I would assume that five or so would already have lending relationships with an Austrian borrower. Which leaves 20 with no relationship that could be interested in a Schuldschein issue.

GlobalCapital: Moving on to the new digital platforms in the Schuldschein market, I know Helaba has worked closely with VC Trade, the leading one by number and volume of issues. But why is the Schuldschein market becoming a hotbed of technological progress?

Gutermann, Helaba: Thanks for this question. Because in all the business we do, with or without a platform, we rarely get a chance to think about the fundamentals of the market. 

Obviously there’s technological progress, and banks either need to accept it, or get run over by it. We’re very happy at Helaba to have been there from the beginning with VC Trade, a fintech start-up we accompanied from the beginning. 

There are now eight or nine different platforms, and there will surely be a shake-out at some point. We’re confident we have the right recipe with VC Trade, which is an open platform to arrangers and investors. 

This should become a market standard, obviously unless something unforeseen occurs. We have a contrast with Debtvision, the platform from LBBW, which as far as I can understand is a little more proprietary. So when we are in a deal with our friends at LBBW, we agree to use both platforms as additional distribution channels, but at some point there has to be a decision on how that proceeds. 

Fundamentally, though, the Schuldschein has been a manually handled product for centuries. It’s really a piece of paper you need to sign, and so we have a lot of different legal mark-ups and a lot of paper changing hands. It’s hard for me to keep track of everything, and I’m glad we have very capable lawyers that can. 

But this way of life seems very wasteful and inefficient. So imagine if you were able to do all of this process in a virtual space, which everyone can work on in real time. This saves time and costly telephone calls and so on. 

With the distribution itself, the more electronic the better. This will mean for an investor that you won’t need to accept a telephone call from a salesperson or be notified in some other way, or constantly read your emails, or even be in your office. 

Instead, you will be immediately notified digitally of a new Schuldschein issue, and have immediate access. 

The platforms are incremental improvements made possible by technological advancement. We embrace it because this is the way the market will be in the future, and we’d rather be on top of it and not have someone else handle this change and create something totally different.

GlobalCapital: Louai, Raiffeisen’s in the privileged position of having both worked on VC Trade and created its own platform, Yellowe. What’s your perspective on digital progress in the Schuldschein market?

Al-Jaafari, RBI: Let’s look at the syndication stages. There are effectively four: distribution, accessing the information package, committing to a transaction via a firm order, and then wrapping up the trade from a back office perspective.

Debtdomain, the existing digital software the market uses, provides the first two steps, distributing via a platform, and accessing the information package. This is already quite convenient, and all investors are already onboarded on to this platform. 

We have an investor base of 500 to 600 in the Schuldschein market, and accessing these investors is done by email or telephone or via Debtdomain. 

It is certainly a trend to be digital, and we need to avoid competitors from IT businesses finding solutions to our problems, and creating further competition for retail and corporate banking. 

VC Trade has prompted many other platforms to follow: LBBW’s Debtvision, HSBC’s Synd-X and we have Yellowe. But in comparison with the others, RBI’s platform is dedicated to sole mandated transactions for us, and intends to provide a platform for our own group, the co-operative sector in Austria. 

So we are not in competition with VC Trade and the like to onboard investors on to the platform. We want to provide the regional, smaller Raiffeisen banks with a platform where they can access vanilla loans and Schuldscheine, with facility sizes between €10m and €40m.

GlobalCapital: Maximilian, as far as I’m aware UniCredit has not distributed via VC Trade yet, and also has not created its own digital platform. Where does your bank stand on digitalising the market?

Hagendorff, UniCredit: The larger European investment banks aren’t simply looking at Schuldscheine, but potentially also focusing on bond markets. 

UniCredit has been on transactions where VC Trade was used, but we aren’t part of it yet. We are observing both its progress and the progress of digital platforms in general.

There is no doubt digitalisation is a necessity for banks, but from an issuer and investor perspective, as long as we have several platforms I don’t see much value being added to the market. Each bank running a platform needs to convince investors and issuers to use that service. 

Platform businesses in a digital world usually end with one platform where the winner takes all. So in this respect, I think you need to have one market standard platform which is open to everyone and easily accessible.

GlobalCapital: Debtdomain has been notably quiet about the digital platforms. It has the biggest reach of any of the platforms, and its head has intimated he may add functionality. Do you think Debtdomain is the one being threatened, or do you think it is the threat to the digital platforms?

Gutermann, Helaba: We’ll know later, I suppose. Right now I am observing, and Debtdomain is too. As Maximilian said, the ‘winner takes all’ should happen, otherwise digitalisation is no use to anyone, and you would have to participate in as many platforms as there were banks. That would be similar to everybody at a movie theatre standing up instead of sitting down, to see better. 

Debtdomain have a very good platform and are involved in every transaction in the Schuldschein market to some degree, so in this interim period they are doing the right thing and waiting it out, and seeing where it all ends. 

GlobalCapital: It is not breaking news to suggest investors are fed up with the sheer number of digital platforms. How many invitations have you had to onboard, Dávid, and how many have you accepted?

Lustyik, KDB Bank: We certainly use Debtdomain. When we receive invitations to participate in a Schuldschein transaction, we can opt to use Debtdomain, or another new platform. We have always stuck to Debtdomain.

It is definitely true that the Schuldschein ties up a lot of workforce, so if there can be an added value to simplify the process and reduce the requirement of human resources, we will try it.

Al-Jaafari, RBI: The stages of a Schuldschein transaction, committing digitally by pressing a button, and signing via a digital signature, that would be something many lenders would appreciate. Otherwise, all they are is fed up with having to sign up to another new platform.

Ondra, Porr: From the issuer’s perspective, too, if you can somehow get rid of, or shorten, the signing process, by replacing manual signatures with digital ones, that would be very helpful. 

There are some platforms claiming to be able to get rid of the arrangers in a Schuldschein issue — let’s see how that goes. It could work for some issuers, that are regular and well known, and use standard documentation. But definitely not for the less frequent borrowers.

But looking at the timing of the whole transaction, the crucial part is due diligence, and that digital platforms cannot help with.

Walch, Fritz Egger: What we’d like to see is a faster process, a leaner process. Our last transaction was our first experience with digitalisation. I’m happy we did it, and we gained some insight, but I wouldn’t go so far as to say it was a totally digital transaction. We used digital help, but in one sense emails are also digital. 

It certainly makes sense to standardise the process, but there’s a long way to go before digitalisation is really end to end — starting with the due diligence process, then the documentation, and also the Q&A with investors. However, digital platforms add a lot of transparency and insight into the process, which we wouldn’t have got in a classical way. 

Ondra, Porr: Looking at our transaction, it was just a limited number of investors we approached, and digitalisation would have made little difference as we only needed to send emails to 10 or 20 investors.

Al-Jaafari, RBI: I’m not a lawyer, and I don’t know the regulations in Austria totally, but I think it still needs to be clarified whether a digital signature would be acceptable by law in Austria. As long as this last step of the Schuldschein syndication is cleared up, there is still some way to go for the market to be fully digital.

Hagendorff, UniCredit: It is slightly more complicated than that. You have to have legal approval for not just one European country, but several. In short, there are civil law and regulatory hurdles to overcome. We will get there, but in the meantime we’ll continue to do things the traditional way.

Ondra, Porr: There is also still participants’ behaviour. At the moment I don’t see a clear benefit of just using a digital platform — you do not have the whole process, so just using it for one single step…

Al-Jaafari, RBI: Besides, not all the investors are onboarded, which is a problem…

Hagendorff, UniCredit: Indeed, some investors might not be open to signing up for a new platform. Of course, the bigger investors have the capabilities to have easy access, but I’m not sure with the smaller investors.

Al-Jaafari, RBI: Unless you are like Lufthansa, and only sell via the platform. But only Lufthansa can do that. 

GlobalCapital: For those who didn’t know, Lufthansa issued a Schuldschein recently that was available only on the digital platform VC Trade. It meant investors had to sign up to the platform. Do you think that was a masterstroke by VC Trade?

Al-Jaafari, RBI: Definitely, yes. Before Lufthansa’s issue, I asked VC Trade how many investors were onboarded on to their platform, and they said it was around 300. Immediately after Lufthansa launched, an additional 80 investors onboarded.

Gutermann, Helaba: With that trade, we were confident we had the right number of investors and the right composition before the launch. We knew if we threw it out there, it would get done. 

There’s a much shorter timeframe with these digital transactions — we’re not talking four-plus weeks, as is typical with the Schuldschein. 

This exclusivity element is right now for the flagship names, but it’s a pretty obvious sell we have and we include it in our pitches, as part of our overall services. 

But this is not just about Helaba — we really must emphasise the openness of VC Trade as a platform. It allows any Schuldschein arranger to come on to it, as well as any issuer and any investor around the world. 

We have numerous examples since the dawn of the digital age, as Maximilian has already said, as to how different formats in the end gravitate towards one solution. We think the best approach is to have an open platform, instead of a proprietary one.

GlobalCapital: Maximilian, what criteria would UniCredit need before it jumped on to a digital platform?

Hagendorff, UniCredit: Digital platforms should definitely benefit three parties: the issuer, the investor and, even if to a smaller extent, the arranger. There are still many different opinions on how to do that, and therefore we are assessing each different solution to align the benefits for all parties.

GlobalCapital: The last round of questions should be to do with the future. Last year the Schuldschein market didn’t grow in volume, but it was very healthy. From a borrower’s perspective, Felix, are you thinking of issuing any time soon, and is there a clear distinction between volume and the health of the market?

Warmuth, RHI Magnesita: We do consider it, of course. We constantly compare unrated bonds, bank financing, private placements and also Schuldschein pricing, and we tap the different markets as we go. Another option for us in the future would be rated bonds, but there are steps to take before that can occur.

Al-Jaafari, RBI: One question we have circled around today is, why the Schuldschein market? I think because it’s resilient. We have seen in 2008, 2011 and 2015-16, when public bond markets are volatile, the Schuldschein remains stable in terms of spreads and capacity. In this market you have a reliable investor base which doesn’t look for ancillary business — all they are interested in is lending to investment grade names. 

Warmuth, RHI Magnesita: For sure, the Schuldschein market is a very stable and resilient market. If you compare the Schuldschein market with rated or unrated bond markets, there’s way more volatility in the public markets, which you have seen especially in the last quarter of 2018 and also at the beginning of 2019. That’s definitely a big advantage of the Schuldschein market and also makes it attractive for issuers.

Gutermann, Helaba: The untold story of the first quarter is we began the year with a lot of uncertainty about where the market was heading, in spreads and everything else. We entered the year on a very sour note, don’t forget — we had done a few transactions in November and December, but we had to overpay to get them done. 

Coming into 2019 we didn’t know whether this would be the future. Is this going to be it? Are we off the lowest possible spreads? In the Schuldschein market we speak of this kind of invisible floor which we can’t break through, because it becomes uninteresting for the investor. 

Wherever that is, it’s around 40bp or 50bp for five years. We were off those levels at the end of last year, and we didn’t know whether there would be widening throughout the year. 

But over the past few months, we are back to that invisible floor level — the end of last year was a storm in a teacup. But we were surprised by this, because at some point all this resilience and stability should give way to wider developments in capital markets, like the ECB cancellation of bond buying and so on. All of this should have influenced the market, but instead we’re just marching on — so, a little bit scary, but overall very positive. 

GlobalCapital: As the market internationalises, you’d think the Schuldschein market would be more impacted by global economic events. Is there any reason why that’s not the case?

Gutermann, Helaba: The thing is we don’t address Schuldschein offerings to your typical portfolio managers, but to loan officers. They march to a different drum beat.

They don’t have an ear all the time on the news cycle, instead they are looking at refinancing costs and credit quality. The product to a certain extent reflects this — we don’t need hours to market a borrower, we need weeks. We’re happy with this because that provides a level of stability.

Warmuth, RHI Magnesita: It’s a more conservative investor base than the bond markets. The Schuldschein investor market is in a big part driven by the German Sparkassen, they are the biggest investors and they are conservative in nature.

GlobalCapital: But also the market’s driven by larger commercial banks. Dávid, are the Asian investors here to stay?

Lustyik, KDB Bank: I don’t see any indication of Asian investors pulling back from the market. As I previously mentioned, Asian banks are largely not opportunistic, but rather pursue conservative investment strategies. As long as the borrowers that come to market have stable financial backgrounds, the appetite of Asian investors will remain stable.

Ondra, Porr: It has been a slightly different experience on our side, but maybe that’s because we’re in the construction sector.

You can see transactions now where Chinese banks are cautious around construction, partly because they have a huge problem in their country — and although five Taiwanese banks looked at our recent deal, they didn’t participate. I haven’t seen any Taiwanese banks in construction for a while.

Walch, Fritz Egger: We saw Asian investors in both our 2016 and 2019 transactions, however they were at least to some extent different investors. Some that were active in 2016 did not focus on the transaction in 2019. But in general, I believe Asian investors are here to stay. 

Al-Jaafari, RBI: Asian investors are sensitive when it comes to industry. Automotive is now an industry they will not touch — whereas last year auto was in favour. 

But on another subject, what I would love to see in the next few years is more issuance from Italy and Spain.

There are so many blue chip corporates in those two countries, and we hardly see any of them. Why not more of them? 

Hagendorff, UniCredit: It is worth noting that some Italian corporates came to the market last year, like Buzzi Unicem and Pirelli. They have access to the international bond market, which is quite competitive. There are of course plenty of well known corporates that may be interested in tapping the market from those regions.

Al-Jaafari, RBI: The Italian corporates are spoilt with cheap funding, which makes it harder to attract them. But, again, there are plenty of names, that we in the German-speaking region know on a daily basis. 

If you go to a supermarket or get a coffee, you’ll see these brands that are blue chips. I’m convinced that even in the smallest village in Germany, someone would invest in this kind of asset.

Looking forward, I’d love to see more from Spain and Italy, which still issue at comparatively low levels compared with Switzerland, Austria, France and the Nordics. 

GlobalCapital: Last year, a lot of people were speaking about America. But now that’s somewhat dried up as a theme. Does the Schuldschein still have an American dream? 

Al-Jaafari, RBI: We’ve seen a few issuers from the US, like Wabco. It doesn’t necessarily need to be facilities in the US — it could be issued via a European entity, and guaranteed by a company in the US, or issued from the US and guaranteed in Europe. The main problem is that pricing is very competitive over there, so why should they? And the big US companies that need euros are usually rated, so can find tight pricing in Eurobonds. 

Warmuth, RHI Magnesita: Yes, lots of US companies issued Reverse Yankee bonds in recent months. Why haven’t we seen those issuers also in the Schuldschein market?

Hagendorff, UniCredit: If you are a rated company, you can issue Reverse Yankees for sure. But I wouldn’t focus too much on a certain country in the market. The only thing that makes it challenging is that they don’t know the product. 

In terms of preparation, a debut issuer from Germany can already take a relatively long time to the Schuldschein market. Now replicate that internationally, in a country outside the origin of the instrument — naturally the process can take a lot longer.

Gutermann, Helaba: There is a wide gulf between the continental way of doing things, including legal aspects, and Britain and the US. So I can imagine the US as an unexplored territory for the Schuldschein market. There is nothing preventing US borrowers accessing the market, except for unfamiliarity with the product. 

We have some examples of course, like Fresenius, which can issue from the German arm to the savings banks or from the US entity with a guarantee from the German side. 

On the investor side, I don’t want to touch there, as the SEC may have certain opinions on that. But the borrower side is there for the taking, if it weren’t for a very well developed bond market. But we’re getting there, and I have some assurances from our legal side that there are no obstacles in that respect.

Warmuth, RHI Magnesita: Before we stop, I would like to ask one question. We were talking a lot about diversification in the Schuldschein market. But how about a different form of diversification — getting more institutional investors, the big insurance companies like Allianz, into the Schuldschein market? They give an advantage in tenor that currently isn’t there in the Schuldschein market. It’s very rare to hear someone issuing longer than 10 years. If that would be possible via institutional investors, wouldn’t that add additional diversification to the Schuldschein market?

Al-Jaafari, RBI: Institutional investors are yield-driven first of all, and they usually only invest in externally rated companies. And, if a company has bonds, they compare the bond levels with the Schuldschein levels — this is a mismatch, they do not understand it at all. Often their starting question is whether we, as an arranging bank, don’t understand the markets outside. Also, Austrian institutional lenders need to be the first lender of the facility, to avoid triggering stamp duty in Austria. 

To cut a long story short, when we talk to institutional investors in Austria, we learn that they have issues with spreads and structuring.

Gutermann, Helaba: It’s really a small overlap with longer maturities in the Schuldschein market. I’ll give you an example: we did a transaction for TenneT a few years back — we hit the sweet spot where we matched the bond pricings at six maturities, six, eight, 10, 12, 15 and 20, which was quite extraordinary. But that turned out to be a tiny moment in time, and a few weeks later the bond market was more advantageous, and we haven’t seen them since. 

Hagendorff, UniCredit: If an institutional investor offers longer tenors, would you take that in return for stricter documentation needs and higher spread requirements?

Gutermann, Helaba: You need an unusual combo. An issuer willing to access the Schuldschein market instead of the bond market, and institutionals that can do their own credit work. It’s a mismatch — but it happens more often than you assume.