A new German export: the Schuldschein’s American dream

If someone said a few years back that Schuldschein desks would have outposts in New York, they would have been met with rolling eyes. And yet, this is what is happening.

Schuldschein originators from the German Landesbanks are stationed in the US to hunt for clients, hoping to take business from the US private placement market, in particular. 

“There are two clear ways we can eat into US private placements so far in terms of price,” says the head of Schuldscheine at a German bank. “Either with European issuers looking to raise dollars, or US issuers on the hunt for euros.”

The two markets have different types of lenders. The US PP is dominated by large insurance companies, prepared to offer big tickets at long tenors, in exchange for stricter covenants and illiquidity premiums. 

In Schuldscheine, over three quarters of last year’s volume was bought by bank lenders, tending to prefer shorter tenors, three to seven years, and more comfortable with lighter documentation. So the SSD market will have to play to its strengths to attract clients from the US PP market. There are signs of this occurring. 

If the market spreads to the US, it will expand its borrower universe, not its investor pool. US institutional investors are better served by the stricter covenant packages in US PP notes, and US bank lenders have not made overtures to Schuldscheine (although Citi is beginning to arrange some SSD deals off its London MTN desk).

“The market has grown more attractive to US borrowers, but not because of an influx of US investors,” says Paul Kuhn, head of DCM origination at BayernLB in Munich. “It is due to international investors from Europe and Asia driving down pricing margins for international corporates.”

These international lenders are more comfortable investing in US borrowers than more traditional German savings and co-operative banks, and they have dollars to lend.  

The market has started to offer dollar tranches. Last year 13 issuers — Carillion, Ecom Agroindustrial, HTM Sport, Huhtamaki, Lonza, NAC Aviation, Neopost, Oiltanking, Phoenix Mecano, Porsche Salzburg, Qiagen, Tarkett and Volkswagen Financial Services — took advantage of that.

The number of instances in which a US issuer can raise dollars with a Schuldschein more cheaply than with a US PP is rare, but growing. The US affiliate of the German Wacker Neuson issued $100m of five year dollar Schuldscheine in March, for example.

The after-swap pricing was similar to Wacker Neuson’s previous Schuldschein issue, a €125m five year sold in 2017 at a spread of 55bp.

“The US company has to have a strong name reputation in Europe, or be affiliated with one that does, and be looking for mid-range maturities,” says Andreas Petrie, head of primary markets at Helaba in Frankfurt, who arranged Wacker Neuson’s deal.

Rudolf Bayer, head of UniCredit’s private placement desk, says: “The higher the link an issuer has to Europe the better. Especially European investors require that link to apply for credit lines to invest.”

But beyond an eight year maturity, the US private placement market becomes increasingly competitive, as most of its lenders are institutional investors prepared to lend at length. But it is still a dollar market, and becomes less competitive when a borrower is seeking euros.

However, there is rising activity for debut Schuldscheine from US issuers seeking euros.

Sherwin-Williams, the US paints and coatings maker, closed its debut Schuldschein for €240m in September last year through its Luxembourg subsidiary. It had fixed and floating rate tranches, and was sold at around 70bp over Euribor.

The Baa3/BBB/BBB-rated borrower was the only US firm to access the market last year, though participants expect 2018 to be more fruitful.

“What is becomingly increasingly popular is a US borrower raising Schuldscheine through a European subsidiary,” says Petrie.

There are an increasing number of deals either issued or guaranteed by US firms. Wabco Europe BVBA, an industrial equipment supplier with headquarters in Brussels, launched a €200m inaugural Schuldschein in February. It was guaranteed by Wabco Holdings, listed in New York.

The reverse is also happening.

Fresenius US Finance II, the US arm of the German medical services company Fresenius SE, raised $400m in March 2016, with a Schuldschein led by Helaba and HSBC. Before that, Arcadis issued $127m through a US subsidiary.

“More of this cross-pollination is expected, and will hopefully provide purer US issuers good examples of successful transactions, as well as getting the international investors used to the borrowers from overseas,” says one Schuldschein banker. 

But the likelihood of a big spike in issuance from pure US borrowers remains somewhat limited, as long as they have access to cheap (and long-dated) funds elsewhere in their native markets.