It might be hard to find anyone in the centuries-old Schuldchein market disgruntled with the instrument’s progress in 2019. Perhaps there is a dark and dusty Sparkasse somewhere in Bavaria, dismayed by the brightness of it all.
For the grand majority of market participants, the last 12 months look excellent from all angles.
“I was quite sceptical for 2019 at the end of 2018,” says Andreas Petrie, head of primary capital markets at Helaba. “But the second, third and fourth quarters have been tremendous.”
Arrangers have brought a record number of deals into the Schuldschein market in 2019. The 150-odd transactions contain some stand-out deals which have helped the year seriously challenge the €27bn record set in 2017.
German car parts maker ZF Friedrichshafen closed its Schuldschein in late September at just over €2bn — the second largest Schuldschein (it had set the record in 2015 with a €2.2bn deal) ever to grace the market, while Gewobag and Porsche sold roughly €1bn apiece in the first half of the year. Deutsche Lufthansa raised roughly €800m exclusively via the digital platform VC Trade in May.
“The year’s volume has been bolstered by large transactions, unquestionably — but we’ve also managed to grow out from the German-speaking region, which has helped too,” says Matthias-Wolfgang Hoffmann, senior Schuldschein originator at LBBW.
The market has made particular headway in France in 2019. The French banks — in particular BNP Paribas, but to a lesser extent also Crédit Agricole and Société Générale — began to offer the instrument to their stable of national borrowers a few years ago — having seen their German competitors do so to great effect and 2019 saw the benefits of that work.
Some 13 transactions came from that country in the first three quarters of the year — including large deals from car maker Peugeot, car parts supplier Valeo and internet service and telecoms company Iliad. This totalled roughly 13% of overall issuance across the first three quarters, according to Helaba data.
“It’s getting ever more colourful, and new arrangers are bringing new borrowers to the market from new jurisdictions,” says Hoffmann.
Extraordinary reliance
In one of the most extraordinary deals ever to reach the market, Indian conglomerate Reliance Industries sold a €405m Schuldschein in May 2019. Given the origin of the company and the likelihood that it was first borrower to issue a Schuldschein via a non-European entity, there was great interest in how the market would react.
But according to sources close to the deal, soft orders swelled to €600m and arrangers KfW Ipex-Bank and LBBW received interest from a wide variety of Schuldschein lenders.
One banker who was not involved in the trade was excited by the deal. “What this shows is that there are investors out there with a taste for regions that haven’t yet come to the market. It’s India now, but it could be China, or Hong Kong, or Malaysia later. Who knows?”
Before Reliance, there had been some exotic borrowers. Etihad Airways — which became the first Middle Eastern company to raise Schuldscheine, in 2016 — issued €209m in euros and dollars in late 2016. The International Investment Bank, a multilateral development agency headquartered in Budapest, launched a €30m Schuldschein in March 2017, while Israel Chemicals and Brazil’s Petrobras have also issued.
Around the same time as Reliance, Tianjin Railway Transit Group, 100% owned by Tianjin and China’s central government and rated A3/A-/A-, raised €200m of 10 year Schuldschein notes in May via Deutsche Bank — the first deal from a Chinese issuer.
But in each of these cases, the deals were smaller and bought by clubs of commercial banks in Europe and Asia. To many, Reliance’s larger and broadly marketed transaction offers a more hopeful illustration of the market’s expansion.
“We can’t underestimate the significance of this trade,” says one Schuldschein arranger, from a rival bank. “Finally, we have an example of a non-Western company coming with a widely sold trade.”
One Schuldschein investor from an Asian bank, who didn’t participate in Reliance’s transaction due to country limits, says: “Large non-European borrowers looking for euro debt need to have signs that the Schuldschein market is interested. Now they have an example — so why not other issuers, like Samsung?”
But there was another example of promising new territory for Schuldschein participants to pore over in 2019, which is perhaps even more substantial for the market’s growth.
Sustainable momentum
This development however was not regional, but conceptual. In 2019 there was a marked increase in green issuance in the Schuldschein market, with a shade under €2bn of green and sustainable debt placed by a clutch of borrowers.
“After the innovation and incubation phases [in the past few years], we are now seeing acceleration,” says Klaus Pahle, head of Schuldscheine at ING in Frankfurt, the bank that has arranged the majority of green Schuldscheine.
The first two companies to issue green Schuldscheine were FrieslandCampina and TenneT back in early 2016, and many in the market expected this would spark a wave of green issuance over the next few years.
But only a drip feed of green and sustainable debt was sold in 2017 and 2018, and it was not until 2019 that momentum started to pick up.
Porsche AG closed a green Schuldschein via BayernLB, ING and LBBW this summer for €1bn. The order book far exceeded that, according to sources familiar with the deal, and the proceeds will go to research and development into electric cars, among other green projects.
But beyond the good public relations and marketing, there has been little incentive for borrowers to engage with sustainable Schuldscheine. For straightforward green deals, treasurers should still not expect much pricing advantage, according to one Schuldschein specialist in Frankfurt. “There’s very few dedicated green funds in the Schuldschein market,” he says. “So there has been very little reason for a borrower to switch on a purely price basis.”
However 2019 saw signs of real change in this regard. Dürr, a German company that makes industrial machinery, raised €200m in an innovative deal led by ING and LBBW in May in which the margins can ratchet up and down, after the deal has settled, depending on the issuer’s environmental, social and governance (ESG) performance.
Dürr’s deal, like many ESG-linked loans, is tied to its ESG rating, in this case from EcoVadis. It scores 51 out of 100, putting it in the top 30% of companies EcoVadis reviews. It marketed five, six, eight and 10 year tranches of fixed and floating rate debt at respective margin ranges of 70bp-80bp over Euribor and mid-swaps, 80bp-90bp, 95bp-105bp and 105bp-115bp.
The coupons can be reduced by 2bp if Dürr can achieve a score of 62 from EcoVadis. If the score falls by an equal number of points, to 40, the coupon rises by 2bp.
Sustainability-linked debt burst on to the scene in the syndicated loan market in 2017, when Unibail-Rodamco and Philips became the first companies to raise revolving credit facilities (RCFs) with this feature.
The structure has proved very popular with companies — almost every week now in Europe, another company converts either an RCF or a term loan to this form, and the technique has spread to Asia and the US.
But the Schuldschein market is different to the loan markets. Although Schuldscheine are loans, they are placed with a diverse group of lenders, which often have no relationship with the borrower.
Dürr proved that such investors would tolerate a sustainability-linked interest rate, even if they had no incentive to please the borrower, and that borrowers in the Schuldschein market could find tighter margins with green and sustainable issuance.
It was not long after Dürr’s deal that others began to replicate it. Austrian cellulose fibre maker Lenzing entered the Schuldschein market in November, offering investors five, seven and 10 year euros, and five and seven year dollar tranches in either fixed or floating rate formats. There is a 2.5bp margin step-up if Lenzing’s MSCI ESG rating is lower than A, and a 2.5bp step down if its higher than A.
Italian infrastructure engineering firm Maire Tecnimont followed in the same week via Banca IMI and UniCredit, but with a margin rise or fall larger than the previous two transactions, making it an interesting test for investors.
There is a 10bp step down if the firm makes CO² savings of at least 10% for 2021, at least 15% in 2022 and at least 20% in 2023. But if Maire Tecnimont does not achieve these targets, it will pay 10bp more.
Given the progress in 2019, many in the market believe 2020 will be rich with sustainability-linked Schuldschein issuance.
“We’ve had a lot of conversations with corporates after Dürr,” says Hoffman. “Listed corporates with a ready need to publish sustainability reports, for these borrowers sustainability linked Schuldscheine will be very interesting. There will certainly be many more to come.” GC