The Schuldschein market differs from mainstream European capital markets in several ways.
It draws a real smorgasbord of investors — from remote German savings banks to South American commercial banks. These investors, and the light documents they will accept, attract new and exotic issuers from across the world. To serve this swelling parade, international banks have been setting up shop to arrange deals and profit from this European success story, barging in on territory that was, until recently, occupied by German banks.
But one of the Schuldschein’s most distinctive features is that it has no secondary market to speak of.
Historically, there was little need for secondary trading. For centuries, the Schuldschein was a domestic instrument. German savings and co-operative banks typically bought paper from German borrowers and held it to maturity.
But as the product has grown in popularity it has developed more sophisticated bases of buyers and borrowers. Now one is as likely to see an Asian commercial bank in a deal as a German Sparkasse.
The needs of market participants have therefore become more sophisticated. As investors start to buy credit with an eye to value — rather than merely to support local enterprise, as the savings banks traditionally did — they want the ability to trade out of positions.
There is evidence to suggest a Schuldschein secondary market is coming into being.
Several investors have told GlobalCapital they have been offered existing Schuldschein debt since the pandemic began.
There is interest in both directions. GlobalCapital reported in March that US banks such as Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley had been bidding for distressed Schuldscheine.
It is not new for Schuldscheine to be sold in secondary offerings. Banks such as Helaba have trading books, while LBBW and ING have sold parts of deals they had underwritten. Sometimes arrangers have acted for certain mainstream Schuldschein investors wanting to refresh their portfolios.
Investors wishing to offload Schuldschein tickets often go through the banks that arranged the deal. The paying agent is the favoured candidate, since it keeps the list of investors, and they are the natural ones to approach. Arrangers tasked with selling Schuldscheine for an investor can expect a fee for doing so, said a senior Schuldschein banker.
The problem is that this ad hoc kind of trading means there are no established norms — such as on fair fee levels — and little competition between dealers.
Some leading players in the market are reluctant to let an active secondary market develop. They fear that BaFin, the German regulator, might reclassify the Schuldschein as a security. Were that to happen, all the benefits the market enjoys from the lighter regulation of loans would be destroyed.
But that is very unlikely to occur. BaFin has made no public noise on this. And why should it? The Schuldschein is one of Germany’s financial darlings. Besides, loans are actively traded, so being tradable should not deprive Schuldscheine of loan status.
The pandemic has surely made many portfolio managers make closer inspections of their positions, and led some to want to refresh their books.
VC Trade, one of the market’s leading digital platforms, is seeking to grow its business by branching into secondary loan trading. It is offering this service for Schuldscheine, too.
Instead of grumbling at the rate of change in this once sleepy market, the Schuldschein establishment should see this as an opportunity. Increasing the market’s liquidity would not be harming the Schuldschein, but remedying one of its defects.