Analysis | How Quirky German Debt Is Winning Followers Abroad

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By Amit


When a beloved local product ramps up production, there’s always a question of whether it can gain new fans without losing what made it special. Something similar has been happening with a German credit instrument known as Schuldschein, until recent years a hidden corner of the European debt market. As the region confronts Russia’s war in Ukraine and inflation, the Schuldschein market has been resilient, posting a record year in 2022 and a strong start to 2023. 

1. What is a Schuldschein?

Schuldschein (pronounced schult-shine) provides an alternative way to raise funds. Not quite a loan and not quite a bond, traditional Schuldschein promissory notes were created by German lenders for reputable local borrowers such as real estate firm Vonovia SE, and supermarket chains Hofer and Lidl. Deals can run from €10 million ($10.6 million) to more than €2 billion, and they can include tranches of different maturities and currencies. In the first quarter of 2023, the market saw a record €2.7 billion transaction for Porsche Automobil Holding SE. Raising a Schuldschein is similar to obtaining a loan: A company asks one or more banks to arrange a deal, which is then syndicated before final pricing is set. Each tranche is then divided up into various-sized slices and issued to lenders, who sometimes number in the hundreds.

2. How is a Schuldschein like a bond or loan?

Deal maturities can range from a couple of months to 30 years. Tranches of up to seven years with structures similar to loans are mostly subscribed by commercial banks, which also participate in the loan market. Savings banks, cooperative banks and investors including insurers and pension funds are usually buyers of the longer-dated tranches which mirror those of bond maturities. Investors and lenders can select floating-rate pricing, usually benchmarked off Euribor like loans, or fixed-rate pricing over mid-swaps, like bonds. Commercial banks are becoming major players and most work on the deals as they would on loans. Marketing periods can be as short as a week or as much as a month for the typically wider-syndicated ones.

Companies from across Europe are turning to this alternative funding channel, which offers a stable liquidity pool where lenders tend to hold their debt till maturity, unlike bond investors who are more sensitive to market turmoil. Even as borrowers were paying high costs compared with previous years, Schuldschein pricing became more attractive than bonds for the first time in years in 2022 amid volatility in other public debt.

4. Is their profile changing? 

Smaller companies with sales of less than €5 billion used to dominate the Schuldschein market, since German banks often use the notes to make loans to them. Local lenders thus dominated the arrangers’ league table, though other banks have climbed the ranking in recent years as the market expanded beyond Germany, Austria and Switzerland to include the likes of Luxembourg’s SIG Combibloc PurchaseCo and Denmark’s Bunker Holding, and encompassed larger newcomers such as Vonovia and EnBW Energie Baden-Wuerttemberg. Lenders now include more international commercial banks across Europe and Asia, instead of just local savings banks, pension funds or insurance houses.

5. What are the advantages for borrowers?

Schuldschein are favored in Germany because they’re private, simple to use and based on local law. The market is light on paperwork, with even €2 billion deals only having agreements comprising a few pages at most — a marked difference from doorstop-sized bond prospectuses. There’s no requirement to publish deal terms because Schuldschein aren’t publicly traded or covered by transparency rules under the European Union’s MiFID II regime. Further cost savings come from not needing a credit rating.

6. What’s in it for lenders?

The biggest lure is comparatively high yields from generally investment-grade borrowers. Lenders can also expect Schuldschein borrowers to draw down the financing, which is better than being paid low fees for providing untapped revolving credit facilities. Also, unlike bonds, Schuldschein don’t have to be marked to market. That’s a boon for investors as the pricing of the instruments doesn’t fluctuate like bonds.

7. What are the drawbacks?

Even with recent growth, only €33 billion of Schuldschein were sold in 2022, about 14% of the amount raised in Europe’s investment-grade corporate bond market, or less than a tenth of the region’s corporate loans. Renegotiating terms in a cash crunch is cumbersome as deals need to be struck with every lender individually. For lenders, Schuldschein investing can entail more legwork than bonds due to the lack of financial transparency and credit reports. The market is also less liquid than bonds, partly due to a predominance of buy-to-hold investors, and the lack of an agent to coordinate during a debt restructuring can prove challenging, as seen in recent cases.

8. How is the market changing?

It has become mostly digitized, with online platforms being set up to automate deal management, replacing a mess of manually updated spreadsheets, phone calls, emails and faxes. VC Trade is the largest, with major arrangers including BayernLB and Helaba using the system, while finpair has even taken the role of bookrunning deals. The Schuldschein market is a strong advocate of sustainable finance, coming up with innovative structures to encourage growth. Schuldschein deals with terms tied to borrowers’ sustainability goals are projected to grow to 50% of the market in 2023 from the record of about 37% in 2022.

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