For the first time in three bankers' memories, borrowers have marketed Schuldscheine with different margins on the fixed and floating rate tranches.
Porsche entered the market on Monday via BayernLB, ING and LBBW, offering investors five, seven and 10 year fixed and floating rate notes. The fixed notes will be priced at 105bp-120bp, 130bp-145bp and in the area of 160bp over mid-swaps. The floating rate notes, however, are offered 10bp tighter, at 95bp-110bp, 120bp-135bp and 160bp over six month Euribor.
The floating rate notes have a 0% floor for Euribor; the mid-swap rate is not floored.
Agrana, a food producer headquartered in Vienna, is marketing a Schuldschein where its floating notes are 20bp tighter than the fixed notes. Helaba, Raiffeisen Bank International and UniCredit are arranging the five, seven and 10 year deal.
The fixed notes have spread ranges of 120bp-140bp, 140bp-160bp and 170bp-190bp over mid-swaps, while the floating notes are at 100bp-120bp, 120bp-140bp and 150bp-170bp over six month Euribor.
In this deal, according to a term sheet, both the rate of Euribor and that of mid-swaps are floored at 0%.
On Thursday, the euro mid-swap rates were quoted by SEB as -0.22% for five years, -0.06% for seven and 0.19% for 10 years. Six month Euribor was -0.311%.
Because Schuldschein deals usually have a floor on Euribor at 0%, the issuer effectively has to pay its full credit spread to the investors on the floating rate debt. But on the fixed rate side, it pays less than the spread, because mid-swap rates are negative.
“The client was clear — the floor on Euribor costs them at least 25bp, and it's trending ever downward,” said a banker close to one of the transactions.
"This has nothing special to do with Agrana or Porsche, it is borrowers calculating the absolute yield difference between fixed and floating and inserting it into the offering,” said another banker familiar with the deal. "It will appear more often if borrowers want it."
The practice of flooring Euribor at 0% for floating rate notes crept into the Schuldschein market in 2016 and 2017, as a temporary fix to the pitfalls of negative rates. A banker said: “In the banking world you have floor clauses, where interest rates can’t go below zero, and this is how it got into the Schuldschein market.”
Investors are now used to having Euribor floors at 0% in Schuldschein documentation. A borrower that does not insert them can expect a cooler reception.
Andritz, for example, entered the market for a minimum of €150m in April via Helaba and RBI. The leads offered four, seven and eight year fixed rate debt and four year floating rate paper. There was no floor on the floating rate. “The trade went fine, but not as well as expected,” said a banker familiar with the deal.
The head of Schuldscheine at a non-German bank said: "The expectation was that as interest rates go up [as the European Central Bank withdraws from public markets] the pressure for pricing floors would vanish. But since [ECB president Mario] Draghi made those dovish speeches this has changed, and floors may be here for a long while, in which case borrowers should take note.”