Don’t use Schuldscheine as a proxy loan market
Loans and Schuldscheine have always sat side by side. With a similar lender base and documentation, the two seem almost interchangeable. This year banks have been capitalising on that similarity and driving issuance to new heights, but they should not get carried away — restructuring a Schuldschein is a lot more painful than with a loan.
Schuldscheindarlehen is crossing new horizons this year with rare currencies and borrowers from new sectors.
This week there is a deal in the market for Irish firm Goshawk for $75m, which one banker described as the first he had ever seen from the aircraft leasing sector.
These deals stand tall in the market formerly led by euro deals for German SME industrial borrowers.
While these are all interesting new directions for Schuldscheine, testing the limits of the market is a dangerous game, especially in a market which relies so heavily on the assumed investment grade quality of its borrowers.
These bold new deals whiff of bank ambition. With loan volumes in Europe drooping this year, Schuldscheine are an attractive replacement for banks.
Schuldscheine offer rare drawn term debt for banks, so who can blame them for rushing in?
One loans head at a US investment bank voiced his surprise that his firm had acted as an arranger for a recent deal. He said he had never expected to see his institution’s name on a Schuldschein.
He also said that, in their eagerness to access the investment, banks have been increasingly making reverse enquiries for Schuldschein.
Non-bank investors have said that banks have priced them out of many deals this year. One investor said that he had only done 20% of the business in 2015 because of competition from Schuldschein-hungry banks.
As a result of keen demand, the market has had a storming year in 2016. Volumes in the first three quarters of the year were higher than any other year (full year figures).
But banks should not get carried away and risk using Schuldscheine as a proxy loan product. Defaults in the centuries old German market are a very different beast to loans.
The critical difference is that a Schuldschein is sold to up to 150 investors (pension funds, commercial banks, savings banks, insurance firms) while syndicated loans are usually provided by just a handful of relationship banks.
When a Schuldschein goes sour, the borrower cannot turn to a small group of relationship banks. They must instead seek the approval of more than 100 lenders in many cases. One lawyer described being “blackmailed” by investors when restructuring a Schuldschein.
“This is a product for nice weather, but not for a situation when things become dire,” he said.
It is possible to club together all debt investors in a restructuring, though, according to Peter Hoegen , partner at Allen & Overy in Frankfurt.
Hoegen has worked on restructuring cases for corporates with various debt products, where all debt investors are brought together in a steering committee and the restructuring terms are agreed by majority vote by all lenders.
However the ugly details are ironed out, don’t forget that the beauty of Schuldscheine is its simple documentation. Don’t let that be the noose with which to hang it.