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Schuldschein: source of strength or store of strife?

Public capital markets remain closed to many borrowers, notwithstanding the Kingdom’s of Spain’s Eu6bn syndicated return on Tuesday. In this environment, many extol the benefits of private and semi-private debt placements, such as the Schuldschein market, for its ability to provide borrowers with funding at even the toughest of times. But the factors that make it appealing could easily contribute to even more instability.

The Schuldschein market is having a good crisis. Borrowers from jurisdictions considered beyond the pale in the public bond markets, have found demand for the product which can be held outside of mark-to-market portfolios among the core German banks and insurance buyers.

This ability for borrowers to fund even at the toughest of times is, on the face of it, a stabilising factor for capital markets. Tailor-made, long-dated, private products give issuers and investors the opportunity to find liquidity when public markets are shut.

But the same factors could also be storing up trouble. Mark-to-market is often a source of instability but when investors are worried about bank balance sheets, its absence can equally create suspicions that make matters worse. And when a borrower can only fund in private — giving the impression of under-the-table desperation — it raises concerns about hidden debts and the true balance sheet position of issuers.

The best guesses of those with close knowledge of the product — given its intensely private nature there are simply no accurate numbers for levels of outstanding issuance — suggest that the Spanish regions have perhaps Eu20bn outstanding and the country’s banks and companies another Eu10bn.

Those aren’t overly big numbers by any means. But with Europe’s bank stress tests on the way — and markets still nervous about financial institutions’ balance sheets and exposure to peripheral European government bonds — any source of opacity can itself be destabilising.

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