Upstart broker rocks up in Schuldschein to spur secondary trading
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Upstart broker rocks up in Schuldschein to spur secondary trading

Trading screens secondary markets from Adobe 25Aug20 575x375

The secondary market in Schuldscheine is rudimentary, partly as the arranging banks have never wanted to encourage it. But a little known brokerage firm is quietly acting as a go-between, helped by its contacts with non-traditional investors, writes Silas Brown.

Impact Capital, a brokerage set up last year with offices in Frankfurt and the Netherlands, is not known to many Schuldschein arrangers, but is starting to facilitate trades in the market. 

The coronavirus pandemic has shaken investors in this usually buy-and-hold market and made some of them want to sell out of specific companies. Other investors sense bargains.

Last week, Impact emailed Schuldschein investors with a list of deals it had buying and selling interest for.

It knows of investors wanting to buy specific Schuldscheine issued by Agco International, Faurecia, Schaeffler and Metro. And it knows sellers of paper from Orpéa, Polytec, Rhenus, Sanacorp, Schoeller Technocell and Schön Klinik. 

Five senior players in the market, including bankers and investors, said this was the broadest secondary trading overture they had ever seen from a brokerage firm.

Since the last financial crisis, the Schuldschein market has developed into the foremost private debt product for larger European companies. For the past three years, it has processed roughly €25bn-€30bn of new issues a year. But as the market has grown, with an influx of Asian and European commercial bank lenders supplementing the older investor base of German savings banks, cooperative banks and insurance companies, there has been next to no secondary market trading.

There have been some initiatives to develop a secondary market – particularly by the Hamburg and Hanover stock exchanges – but as buy and hold investors, Schuldschein lenders have not shown much interest in trading out of their positions.

But the idea appears to be taking hold. VC Trade, one of the leading digital platforms in the market, has set up a secondary market function. Several bankers now see the development of a secondary market as inevitable. “It’s a matter of when, not if,” said a senior arranger at a Landesbank.

When approached by GlobalCapital, one of Impact’s five partners said: “We have seen a lot of these sellers in the Schuldschein market since April. In Schuldscheine, banks have loaded up very heavily and the investors, who are usually buy and hold, realise they have a large exposure or concentration risk on certain industries such as automotive.”

The partner said he had identified three types of sellers in the Schuldschein market, and his firm was interested in pursuing all of them. “There are those that sell investment grade credits for regulatory reasons (Solvency II for insurance companies or Basel III for banks)," he said. "Then there is a second type that sells B/BB credits due to overexposure and wanting to derisk a bit. The third type sells distressed credits in order to avoid restructuring negotiations."

For the first two types of sellers, he said, "matching prices is usually not a problem".

But for distressed names, "the seller often hasn’t realised that he has to take haircuts of 10%, 20% or even more than 30%. In this case, there’s a big divergence between bid and offer – we’ve had multiple possible transactions which didn’t happen, due to the seller not being willing to take these types of losses."

He said that beyond the names listed above, Impact Capital was also active in Lufthansa and car parts makers Continental and Mahle. “As these names are performing credits, they would fall either into category 1 or 2.”

How to take seconds

If a Schuldschein investor wants to reduce its exposure to a certain credit, it can. Usually, it would approach the paying agent on the initial deal and ask whether it could find an investor in the original syndicate to take on the exposure. Though this happened rarely, the Landesbanks – typically the paying agents in Schuldschein deals – would provide that service.

But this approach can often not work. If the credit in question is from an ailing sector, like, at present, the car industry, travel or retail, it can be hard to find lenders already owning the debt that want to take on more.

The partner at Impact said his firm had found a set of investors, particularly from southern and eastern Europe, will little exposure to the Schuldschein market or its issuers. “We have found investors which are interested in buying fallen angels, single-Bs or double-Bs – they can take on risks that other savings and cooperatives banks can’t," he said. "Our investors are not hedge funds mostly, they are asset managers, private banks with higher funding requirements or insurance companies with better solvency ratios which are not covered by the Landesbanks. The further south and east you go the higher the funding and return expectations of our clients get. They look towards a German auto [industry company] as still being a reputable company which they see as a good way to diversify their risk.”

Some Schuldscheine carry terms forbidding investors to sell the loan to another investor without the borrower’s consent. In these cases, which according to several market sources are the minority, a company might prevent an investor from selling its Schuldscheine – particularly if it was to investors like hedge funds. 

“On the distressed side, there are a few hedge funds out there – they are the ones buying in order to have more leverage at a later stage,” said the partner. “Traditionally, it’s not an asset class which the high yield investor goes into – it’s always been a little private – but it’s just a special situation in terms of volatility. So much has happened in seven or eight months.”