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Schuldscheine in 2016: a year of firsts

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The Schuldschein market grew sharply in 2016, adopting issuers from new sectors and jurisdictions as well as first time arrangers and investors. The market is expected to maintain healthy volumes and international growth in 2017, though with investor capacity stretched to the limit, volumes are not expected to exceed the levels seen this year.

By November this year volumes had surpassed the levels achieved in any previous year. The level of activity was so furious that business continued apace throughout the summer and was not slowing even by mid-December.

“Investors are still out there and very interested,” said Paul Kuhn, senior vice-president at BayernLB in Munich. “There is no sense of shutting down over Christmas and there was no sense of shutting down over the summer — we closed €3bn of deals between June and August.”

Three market participants said that they expect €25bn in total volumes this year, far above the previous record of about €20bn set last year.

It is an imrpessive result considering the year began with moderate expectations. Speaking in January, a number of Schuldschein bankers predicted a calm year, particularly in terms of investor appetite.

“We may not see huge oversubscription in 2016,” said one banker. “I don’t expect deals to be three or four times oversubscribed.”

But the quoted banker was thoroughly disproved by a number of bumper deals in the first half of the year, such as a €1.1bn deal for Porsche and Austrian retailer Hofer’s transaction for €1.6bn.

In March, there was also the largest ever dollar Schuldschein, a $400m deal for healthcare company Fresenius. German supermarket chain Lidl signed a hefty €800m deal in the summer.

The combination of uncertainty ahead of the US Presidential elections and tireless investor demand kept up activity.

“As we were approaching the US elections, nobody knew what the impact would be on currencies so issuers took advantage of very low pricing levels at the time,” said Kuhn.

Green shoots

Aside from successful deals for well-known issuers, the market also saw its first ever green Schuldscheine this year.

German wind turbine manufacturer Nordex became the first borrower to issue an accredited green Schuldschein in March, raising €550m in three, five, seven and 10 year tenors. Then Dutch dairy firm FrieslandCampina completed its deal for €300m, increasing the Schuldschein by a third in syndication.

Dutch electricity grid company Tennet and Spanish infrastructure and renewables firm Acciona brought the third and fourth green deals later in the year.

While the deals stoked much interest in the Schuldschein community, the trend may not be a strong theme in 2017, given the arduous documentation required, according to BayernLB’s Kuhn.

“We are in discussions with more potential green issuers, but the questions is always ‘what is the aim of the transaction?’ since the documentation becomes less lean and less straightforward with the green accreditation,” said Kuhn.

After the green deals took the lead for diversity, borrowers from regions far away from Schuldschein’s German-speaking issuer base stepped forward later in the year.

The market hosted deals from borrowers from Ireland, Spain, the UK, the US, and even the first deal for a Middle Eastern borrower, €209m for Etihad Airways in December.

With the expansion of the issuer base, new arranging banks also joined the market. Rabobank (working alongside Raiffeisen Bank International) was an arranger for FrieslandCampina’s borrowing while Japan’s Mizhuo cropped up as a lead for Swiss frozen bakery supplier Aryzta’s deal in November.

US bank Citi, which has arranged many non-syndicated Schuldscheine in the past, stepped forward to arrange one of its first syndicated deals for Groupe SEB in November.

“It was a natural evolution to become active in syndicated trades, especially in light of the increasing internationalisation of this product,” said Felix Weiss, vice president, MTN and private placement origination and trading at Citi in London. “Clients started asking for it. It became a very strategic instrument in the recent years, especially to refinance M&A."

The prominence of international arrangers should continue, given the growing role of banks as investors, particularly Asian ones, said Weiss. “I wouldn’t be surprised to see some more Asian banks selectively trying to take arranger roles, since they are increasingly acting as investors.”

Demand from Asian banks has been the main driver for growth in the Schuldschein market this year because the product offers them a lending relationship with highly sought-after European credits.

“If you’re interested in European companies you can consider Schuldschein, and it is easy to settle because it’s not settled through a clearing house,” said a banker in Hong Kong.

Western European banks have also been taking a bigger chunk of the action in 2016, with volumes in the European loan market down about 30% year on year, Schuldscheine are an attractive alternative.

“Western European banks have increasing interest, at our events in Spain and London there was a significant number of new potential investors in Spain, the UK and Paris,” said Kuhn, based in Munich.

In the recent deal for Groupe SEB, which drew a mammoth book of nearly €1.2bn in orders, banks made up 90% of the investor base. Some 30% of investors were from Germany and 27% from Asia, French investors accounted for 21%.

Capacity stretched

While supply and demand went from strength to strength in 2016, the main hindrance to the market was investors’ ability to process the high volume of deals.

“Some investors are saying that they have capacity issues, they are bottlenecking because of all of the deals,” said a banker in Frankfurt in November.

Given that the market is used to volumes of about €15bn a year, the problem of investor capacity will limit growth in 2017, according to Kuhn.

“The market will not be able to increase volumes to a great extent, investors would be overwhelmed with the number transactions,” he said.

The BayernLB banker expects more measured volumes of €20bn in 2017.

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