German market takes on increasingly international hue
The Schuldschein market attracts an increasingly international clientele. A host of foreign borrowers has been paying trips to this once clubby German market to enjoy a pleasant cocktail of light documentation, cheap funding and a deep pool of investors — many of which are also international. Silas Brown reports.
German issuers could soon be outnumbered in that most German of markets, the Schuldschein, by foreign borrowers.
In 2016, the number of international deals — 60 — almost reached parity with domestic ones. That was a very steep rise: in 2015 it had been just a quarter.
There are two main reasons for growing overseas issuance — light documentation and competitive pricing.
The wide variety of lenders that have been attracted to the flexibility of the product can take credit for the tightening prices. Investor demand for Schuldschein credit is substantial, and has been fuelled especially by rising demand from banks, especially outside Germany, which have plenty of cash and want assets.
As a result, mid-market, unrated foreign borrowers, like Orpéa, the French retirement homes group, can place loans of €200m and in some cases much more, and more often than not, they are oversubscribed. The range of these issuers has expanded to include a variety of unusual, debut borrowers.
Spate of debuts
In the Schuldschein market, one or more arranging banks brings a borrower to the market. As non-German banks have become involved in the market as arrangers, often hiring experienced bankers from German firms, they have brought in more clients from further afield.
“The involvement of international banks has helped the internationalisation of the Schuldschein market,” says Raoul Hessling, Schuldschein specialist at BNP Paribas in Frankfurt.
Orpéa’s deal, for example, was led by BNP Paribas and Société Générale. New arrangers entering the Schuldschein last year included Rabobank and Mizuho.
“Every second deal across ING’s desk is from a new issuer,” says Klaus Pahle, head of ING’s Schuldschein desk, who ran inaugural Schuldschein deals for two Dutch firms last year: dairy co-operative FrieslandCampina and power grid Tennet. In another new flavour for the market, both deals were structured as green securities, with the proceeds earmarked for environmentally favourable activities. Acciona, the Spanish renewable energy group, also issued one.
The first half of 2016 brought 14 debut issues from international borrowers — double the number in the whole of 2013. In the third quarter of 2016, more than 40% of transactions, according to Helaba, were from debut borrowers.
Foreign arrangers are the energetic gatekeepers, but it is the investors that make new issuers want to enter the market. Lenders — especially from overseas — are funding inaugural issuance at a growing rate.
Almost three quarters of BNPP’s Schuldschein activity in 2016 was placed with international investors.
And the range of borrowers able to access that pool is increasing.
The International Investment Bank, an ex-Soviet multilateral development agency little known in euro capital markets — though it is rated by all three major rating agencies and has obtained euro loans and bonds in some east European currencies — embarked on its first Schuldschein in February.
The industrial sector — dominated by German issuers — is still the largest in the market, supplying 46% of issuance in 2016. But the healthcare and technology sectors are becoming more active and, as debut issuance rises, the range of sectors will broaden.
Schuldschein dines out at Euro PP’s expense
The Schuldschein market should bear some responsibility for the decline in issuance of Euro private placements — the neighbouring, but much younger, French-based market. Volume there fell 30% to about €5bn in 2016, according to Crédit Agricole.
Big Euro PP issuers like Lactalis, Sonepar and Plastic Omnium found cheaper pricing in bank loans and Schuldscheine.
“Issuers find a Schuldschein market where documentation is leaner, pricing is cheaper, and investor pools deeper,” says one German savings bank investor.
Documentation favours the issuer over the investor. It is light, with comparatively few restrictions on the borrower, and no need for a securities prospectus. And with light documentation comes lower legal fees.
The pricing cost is 15bp-30bp cheaper than the Euro PP market, due to the depth and type of active investors.
“Asset managers and insurance companies, the key investors in the Euro PP market, have certain yield requirements and require a higher pricing,” says Jörg Stührwohldt, managing director of corporate origination at UniCredit in Munich. “As banks dominate the Schuldschein investor base, pricing is in line with — sometimes even lower — than in the loan market.”
Take Groupe SEB, the maker of kettles and toasters, which set a new record for French borrowers in December, issuing an €800m Schuldschein.
The transaction offered fixed and floating rate notes at three, five, seven and 10 year maturities, at spreads of 75bp, 100bp, 125bp and 150bp, and grew from an initial size of €300m.
“It’s difficult to raise more than €250m from other private placement markets,” says Emmanuel Arabian, SEB’s vice-president of group finance and treasury. “The floating rate tranches are, in addition, callable at each interest payment date, which strengthens the flexibility of the instrument.
“The US PP was not an option for Groupe SEB because there are too many constraints on this market, like ratings, covenants, documentation in general, due diligence. And with one transaction, the issuer can smooth its debt maturity profile, and can have a fixed and floating rate exposure.”
German investors bought took 30% of SEB’s Schuldschein, the rest was shared by overseas investors in Asia and western Europe.
Some issuers consider the US PP market too document-heavy, while the Euro PP costs too much.
Schuldschein: still receptive
One strength of the Schuldschein market developed quite by chance. The lightness of the documentation — intended to reflect the deep relationships between traditional borrowers and investors — allows the market to adapt to a borrower’s needs quickly and effectively, in a way that other ways of raising debt cannot.
“The smaller issuers are increasingly replacing term loans with the Schuldschein product, mainly because of factors such as pricing, possible tenors and flexibility,” says Stührwohldt. “There are a lot of limitations with syndicated facilities for issuers — not simply financial covenants, but stipulations on whether the company can use growth opportunities such as M&A deals.”
The market is still developing, both in the range of tenors it offers and in other ways, such as a rise in multi-currency transactions.
“Did the tail wag the dog, or vice versa? Multi-currency Schuldscheine are attractive for international investors and issuers,” says Andreas Petrie, head of primary markets at Helaba in Frankfurt.
Issuers have funding needs in different currencies, and some investors prefer providing funds, for example, in dollars. Last year brought tranches in dollars, Swiss francs, sterling and zlotys.
If the Schuldschein remains as responsive to foreign borrowers as it was in 2016, and banks around the world remain as hungry for investment grade corporate debt, there is every chance international issuance could overtake German this year.