Some say the Schuldschein, a centuries old German instrument with a reputation for prudence, is an odd home for technological innovation. But the market has a few features that make digitalisation more welcome.
First, there is a need for more efficiency. Unlike the comparatively small investor pools in US and Euro private placements, a sales team at an arranging bank in the Schuldschein market may have to field calls and emails from up to 600 investors, which requires time.
On the borrower’s side, executing a Schuldschein deal can take six to eight weeks, and involves countless interactions between arranging banks and investors. Transaction costs, like arranging and legal fees, rack up. By digitalising the transaction, the process could become more efficient, and as a result more cost-effective for the borrower.
Crucially also, under the German Civil Code — the legal basis of a Schuldschein contract — the product is classified as a bilateral loan, as opposed to a bond security, which means it sidesteps the complexities of MiFID II and other regulations. This means digital platforms have much greater flexibility to test ideas in the Schuldschein market, without as much fear that regulators from the EU or Germany’s Bafin will clamp down on them.
“The Schuldschein is, in a sense, very easy to understand,” says Klaus Distler, head of corporate debt capital markets at Helaba in Frankfurt. “The documentation is not cumbersome and it is standardised in the market, so it is an ideal instrument to look at digitalising execution.”
Before the groundswell of platforms one digital platform, Debtdomain, existed. It is mostly used for distributing documents about new issues to the many investors who are registered on the platform, but also allows the investor base to be divided up among the arrangers of a deal, so that they can each market to a separate segment.
Last year, some 146 Schuldschein deals flowed through Debtdomain — almost every one issued.
But there are a series of inadequacies, for example no capacity for logging soft ordering, that the other digital platforms feel they can improve on.
The process of gathering orders is something VC Trade, a new digital platform promoted by BayernLB and Helaba, has homed in on. Up to now bids have usually been collected over email, by phone or via Debtdomain (among other routes).
Using VC’s software, investors place soft and hard orders via the platform. “What we saw was quite a fragmented [bookbuilding] process,” says Sebastian Glock, co-founder of the platform. “With VC you have a one venue approach, a centralised order book with algorithms to allocate.”
Eleven’s a crowd
But VC Trade is not alone in attempting a centralised system for the Schuldschein, and to tighten the work of Debtdomain.
Six digital platforms have been launched by banks — 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 three platforms are from fintech companies CredX, Firstwire and FinnestPro.
All of these digital platforms attempt to carry an issue from origination through to completion of execution (some claim to go through to maturity of the loan), to be a one-stop-shop for any borrower looking to sell Schuldscheine, and any lender seeking to invest.
But there are ways of distinguishing the digital platforms beyond this. Some platforms, like CredX, Debtvision, and Finpair, focus on connecting borrowers with investors, without the need of an arranger managing the trade. Others, like Synd-X and VC Trade, are seeking to digitalise the process without disrupting traditional relationships between arrangers, borrowers and lenders.
Some platforms, in particular the bank-affiliated outfits, are selective about which arrangers and borrowers can participate on their platforms. Others have emphasized the openness of their platforms, and allow any arranger, borrower or lender to join.
But though many platforms have muscled their way into the market, some have provoked more curiosity than others, and are thought to be more ambitious. In the minds of many, two stand out from the pack: VC Trade and Debtvision. They lead the others in number of Schuldschein issues flowing through the platforms, as well as overall volume and market share.
Investor pushback
However, not everyone in the market has welcomed technology. Some investors have struggled to keep pace with digitalisation, and are exasperated by the sheer number of overtures they have received to sign up to different digital platforms.
“Every week it seems we get a call or an email from a new platform asking us to subscribe,” says an investor at a German savings bank. “It’s enough for us to keep up with new issues, let alone new platforms.”
Another investor from a non-German bank says: “Checking in and registering with all these platforms will be a nightmare, and particularly frustrating if deals are then not run through them. There’s simply no way the platforms are going to convince all the investors to sign up to every platform.”
This belief, if true, is a serious problem for digital platforms. To be considered of real value to the market, participants say a platform must boast all the investors as active subscribers. Only then can it claim to offer a comprehensive arena for Schuldschein issues.
This is what platforms have struggled with.
“In my conversations with hundreds of investors in the Schuldschein market, a large number are frustrated by change, and don’t see much added value in signing up to new technology platforms — whether this is just being frustrated by change, or something more, I’m not sure,” says an arranger at a Landesbank.
Platforms need to demonstrate to investors how they are adding value.
“I see Schuldschein syndication as falling into four stages — you have invitation, then bookbuilding, then committing and finally the back office signing off and settlement stage,” says Louai Al-Jaafari, director at Raiffeisen Bank International in Vienna. “Each platform out there has the first three stages done, but no digital platform has solved the signing off and settlement stage. If a platform can solve this final stage, then investors would see real value.”
Rudolf Bayer, head of UniCredit’s medium term note and private placement syndicate desk in Munich, says: “We are still at an early stage. The platforms have primarily focused on front end activity, like building up order books and centralising investor questions. This is a good start, but where we see true efficiency gains is in the back office — sorting out the manual process of settlement, for instance.”
There are two ways to entice an investor on to a digital platform: offer additional functionality that will make their front and back office processes more efficient. Or give them an offer they can’t refuse.
Subscriptions, subscriptions
Investor subscription has become the barometer for success in the market and in March Lufthansa took the daring step of selling a Schuldschein exclusively via the digital platform VC Trade.
This meant that BayernLB and Helaba, Lufthansa’s arrangers, would not accept bids via email or phone, and a lender needed to subscribe to VC Trade in order to commit to the Lufthansa Schuldschein.
This was considered a shrewd move by much of the Schuldschein market — overnight, VC Trade had around 80-100 new investors signed up, and Lufthansa’s order books swelled to over €1bn.
“The Lufthansa trade for us proves that we were right about being an open platform,” says Glock. “If you are an open platform, you will draw in all the participants, and if you do that you succeed.”
One investor says: “VC Trade has demonstrated a better understanding of the market than any other digital platform that’s recently launched — it understood that to capture the market you have to be open, and find ways of bringing in the investors. However, I think they should be worried about a platform they perhaps haven’t really considered — Debtdomain.”
Debtdomain, the incumbent platform mostly used to distribute documents, ran its first transaction in the Schuldschein market in September 2007 for Investec via WestLB, and counts nearly every investor in the Schuldschein market as a subscriber.
But, as primarily a syndicated loans platform, it has devoted less resources to developing technology to confront issues specific to the Schuldschein market. However, with its headstart in having clients onboard, it may build additional functionality to counter any edge the independents have gained through innovation.
Sean Tai, founder of Debtdomain, who has been watching the digital launches, told GlobalCapital in March: “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.”