Time to end the German home bias in Schuldschein
A German company, of implied investment grade, can waltz into the Schuldschein market, expecting shrinking margins, and a bulging order book. A foreign issuer’s journey is more complicated, and much more costly. For the Schuldschein to be the cosmopolitan darling of international private placement markets — German issuers must lose their home advantage.
If a foreign borrower enters the Schuldschein market, expect two things: the leads will offer wider margins than seen for domestic issuers, and almost all Sparkassen investors — the brittle backbone of the German market — will not participate.
The two predictions are connected. Sparkassen banks, notoriously prudent in their investments, favour issuers from Germany’s industrial heartland, thus driving down domestic margins.
It is rare to see Sparkassen participation without a Landesbank arranging the deal. And there is some sense to this. Arrangers often refuse to share internal ratings with Schuldschein investors, so there needs to be trust in the investor’s relationship with the arrangers.
Arrangers are seen as effective gatekeepers, warding off issuers that can’t uphold the market’s credit quality standards. And, so far, the arrangers have been successful.
A patient Helaba analyst concluded — after analysing the credit quality of almost every Schuldschein issuer since 2010 — there is scant difference between credit metrics of foreign and domestic borrowers. And yet, there is a substantial difference in price.
Last week, oil and gas company MOL became the first Hungarian issuer to launch a Schuldschein — and, the Baa3/BB+/BBB- rated company is offering margins roughly 35bp-45bp wider than a German equivalent, said a banker familiar with the deal.
“There is a native bias in the Schuldschein market,” said one head of Schuldschein desk at a German bank, asking not to be named. “And, it will be very interesting to see MOL’s reception from the Sparkassen banks.”
The rise of international bank investors — from Asia and Europe — has brought enticing opportunities for issuers’ beyond German borders, and meant German investors are less targeted in transactions like MOL’s. Beside Germany's next door neighbours, Austria and Switzerland, commercial banks have lent to issuers from the Czech Republic, Luxembourg and Poland.
But, foreign borrowers' margins are still substantially wider than German issuers, even when all research shows little difference in credit quality.
As long as credit metrics are available, and due diligence possible, there should be little reason for the division between domestic and foreign credits to exist. To be a truly international market, traditional investors should embrace the new supply, and start engaging with fresh, well-rated, foreign credits.