The Schuldschein — Germany’s corporate finance export
Germany’s document-light form of private debt placement, the Schuldschein, has been deeply rooted in the German market for years. The market opened up slowly to Austria and Switzerland — on both the investor and issuer sides. But recently a much more international audience has caught the bug. Stefanie Linhardt asks what attraction the product holds, and why issuance is not growing faster, when demand is so strong.
The Schuldscheindarlehen, Germany’s domestically rooted private placement debt product, has come a long way.
Neither exactly a loan nor a bond, the instrument was traditionally issued by unrated but investment grade-style German companies and bought by German banks — Landesbanks, Sparkassen and co-operative banks.
But it now offers much more than that — varied issuers from a range of countries, several currencies and flexible maturities. All that attracts more investors.
Participants agree that this traditional product is a modern success story, even though issuance is not running at record levels.
The boom year for Schuldschein issuance was 2008, when some €18.9bn of deals were sold, according to research from IKB Deutsche Industriebank. The record before that was 2007’s €5.5bn — since then the busiest year was 2012, with €12bn.
“In 2008 we clearly had a different environment, with different necessities for corporate borrowers, which used the Schuldschein market,” says Bettina Streiter, head of corporate origination at DZ Bank in Frankfurt. “Due to the financial crisis we saw bigger transaction volumes, whereas currently, we are going back to the roots.”
That means smaller transactions from Mittelstand companies, often with annual sales of less than €500m.
While in 2008 there were deals as big as €1.25bn — the largest ever Schuldschein, issued by BMW — more than half the deals in 2013 were between €50m and €150m, says Raoul Heßling, director of loan capital markets at Commerz-bank in Frankfurt. This year, many issues have been between €50m and €100m.
“In January and February 2014 there were eight deals, compared to 14 in the same period of the previous year,” says Heßling. “Seventy-two companies raised €8.2bn last year. That is a decline of roughly 35% compared to 2012, which is mainly due to companies requiring less financing.”
Companies are reluctant to start large capex programmes and mergers and acquisitions are subdued, so lots of firms prefer to refinance and deleverage, which can be seen in Schuldschein volumes. But while banks are scouring their contact books for potential issuers, investor demand is strong and growing.
Selling like hot cakes
“Last year, demand was so much stronger than supply that we often had to close order books early to avoid extreme oversubscription,” says Streiter. “We wanted to secure the allocations of investors who had put orders in early in the process and had done all the credit work.”
Usually, Schuldschein issues are marketed for four weeks. In the second half of 2013, many marketing periods lasted only one or two weeks.
“We have more parties that are interested in the market,” says Streiter. “Foreign investors, insurance companies and pension funds are all looking to buy, and not just the broadly marketed deals. Especially pension funds and insurance companies have also shown interest to buy single tranches on a one-on-one basis.”
In its German market outlook for 2014, IKB said it expected institutional investors such as pension funds and insurance companies to assume increasing importance in the Schuldschein market, as a result of Basel III.
However, these institutions still need to adapt to the attitudes of a very bank-dominated market, argues Stefan Oldendorf, co-head of Germany syndication and sales at Commerzbank in Frankfurt.
“In the Schuldschein market, investors do their own credit analysis and it is not just rating versus price that makes up an investment decision,” says Oldendorf. “Still, we see some larger insurance companies considering putting teams together with more focused approaches. These are opportunistic moves but it definitely is the way to go.”
Some regulatory changes are supporting insurers in their quest to find new investment opportunities in Schuldscheine. Guidelines drafted by the German insurance federation and approved by BaFin, the Federal Financial Supervisory Authority, in June 2013, are more lenient to insurers buying Schuldschein issues that lack financial covenants or extraordinary put rights.
“Last year, 12% [of Schuldschein issuance] was absorbed by institutional investors,” says Heßling. “The share of institutional investors is increasing, but it’s still more of a potential for growth than a market changer for the time being.”
Regulation in Austria is also encouraging investors to go into more credit-intensive loan products, following the model of BaFin’s guidelines, according to Oldendorf.
Meanwhile, a variety of Asian, UK and French investors are also increasingly interested in buying Schuldscheine.
The largest deal of 2013 was a sign of the times. Issued by a French company, Zodiac Aerospace, which makes aircraft interiors, the €535m transaction was around 60% placed with with investors outside Germany.
Some of them are not content to wait for Schuldschein deals to come along. “Some private placement investors are asking us directly for private placements under Schuldschein documentation,” says Ursula Radeke-Pietsch, head of global capital markets at Siemens in Munich, which has so far only issued one Schuldschein. “These investors are international development banks or international investors.”
Issuers call the shots
“We are seeing a decrease in margins [on Schuldschein transactions] — very similar to the trends in the bond market,” says DZ Bank’s Streiter. “Credit risk is no longer paid as well as during the crisis, as many corporates have proven to be resilient and these healthy [financial] numbers have to be paid for by investors.”
With spreads so tight, investors are looking for other ways to pick up yield, notably longer maturities. Transactions have stretched from the norm in 2012 of three or five years to five to 10 as standard in 2013, according to IKB.
“We sometimes even get more demand for seven year tenors than five years, because margins are so compressed,” says Heßling. “And for certain investors liquidity is still a topic, so it makes sense to go further along the maturity curve to get some attractive spread pick-up.”
Biotest, a German pharmaceuticals company, took advantage of that bid for longer maturities in 2013. The unrated company raised a total of €210m in five, seven and 10 year tranches.
“We are planning a relatively large capital expenditure to double our production capacity,” says Martin Möller, corporate finance and treasury, at Biotest in Dreieich, near Darmstadt. “For that we did a capital increase as well as a Schuldschein last year. A 10 year maturity made sense in the respect that this is in line with our business model, and our banks promised us that this maturity could work well in the market.”
Only wanting to borrow €210m, Möller ruled out a Eurobond issue because the size would have been too small. The Schuldschein offered attractive terms.
The issue drew an order book of €350m. German investors took 86% of the paper, but Biotest also sold some to accounts in Switzerland, Austria, the UK, Asia and the Middle East.
Dollars on the menu
As part of its transaction, Biotest included a five year tranche of $50m.
“The option to be able to also issue in dollars was a central point,“ says Möller, “because we wanted to raise some funds to finance our US subsidiary. It wasn’t quite as easy as issuing the euros and slightly more expensive, because there aren’t as many investors interested, but we reached our $50m target.”
It was Biotest’s first ever Schuldschein and the company would consider issuing again in the future.
Apart from dollars, sterling and Swiss franc Schuldscheine have been issued, allowing companies to tailor their debt structure to their needs. Buying other currencies can also prove attractive to investors.
“Issuers often offer a certain premium for other currencies than euros,” says Heßling at Commerz-bank. “However, we have seen a strong decrease in premiums in this respect. We started with roughly 40bp-50bp in 2012 and have come down to around 20bp [for dollar issuance]. This reflects that it is easier for issuers to fund in US dollars. Whereas in 2012 the demand was mainly driven by Asian investors, we are now able to sell to traditional investors, too.”
With Biotest’s $50m tranche being one of the largest dollar portions ever issued, there is still room for growth.
“At the moment, Schuldschein is not an instrument for issuing significant amounts in US dollars but, you never know, if this were to become possible, I can imagine that it would be an interesting instrument [for us],” says Radeke-Pietsch at Siemens, “especially because disclosure requirements for issuing dollar bonds in the US are even more stringent than in Europe.”
Light documentation is one of the Schuldschein market’s big selling points for issuers. There is no requirement for issuers to disclose their latest financial results, risk factors or litigation issues. That makes the Schuldschein not only easier but faster for issuers than some other products.
This, coupled with the investors’ more relaxed attitude to market volatility — Schuldscheine do not have to be marked to market — can make Schuldschein issues an attractive and reliable alternative even for rated blue chips.
“When issuing a public bond, you have to go the long route preparing a prospectus with accompanying documentation, which has to comply with the European prospectus guideline requirements, disclosing everything, including your financial statements, risk factors, litigation issues etc,” says Radeke-Pietsch at Siemens. “In addition you have to respect company-internal quiet periods where you cannot issue bonds at all. Quiet periods do not exist for Schuldschein issues because you only have to prepare a stronger loan documentation.”
Siemens issued a Schuldschein in 2007, partly to fund the acquisition of Dade Behring, the US maker of medical diagnostics test machinery.
“We didn’t know whether the market was still going to be in good shape when we came out of our quiet period,” Radeke-Pietsch says. “We wanted to be on the safe side and to issue in time, when the markets were attractive. Therefore we decided to issue a Schuldscheindarlehen.”
Word about these benefits has spread far and wide. While in 2011 only about 13% of the €7.06bn of issues came from non-German companies, in 2013 about a third came from abroad.
“Half of the international issuer base is from Austria and Switzerland and the other half are from European countries including France, the UK, Finland, Sweden and Luxembourg,” says Heßling. “We expect the internationalisation to continue and we hope to add some further nationalities on the issuer side.”
Besides the Zodiac Aerospace deal, other foreign companies that issued Schuldscheine in 2013 included Valora, the Swiss retail holding company, French seed producer Vilmorin & Cie, and Amer Sports of Finland, which owns sports equipment lines such as Salomon, Wilson and Atomic.
“We have had a steady flow of foreign names come into the Schuldschein market,” says Streiter. “Success still depends on the individual credit profile, name recognition and structure, but the market has opened up. At the moment, with the very limited number of deals in the market, demand for foreign names is supported, but if there was a lot of supply from interesting domestic names this demand could fade away.”
Lower ratings: the new frontier?
For the moment, this is not a concern. Supply of deals lags far behind investor demand. So where could bankers find the missing issuers?
“The number of crossover credits is increasing but it is still a smaller portion of the market,” says Streiter. “Some investors have their internal limits of what they can buy. There would be a whole lot more supply if the ability to buy these credits was to increase.”
Fresenius, the German owner of kidney dialysis clinics rated Ba1/BB+/BB+, falls into this category. But thanks to its strong name recognition and its Dax listing, Fresenius does find support in the Schuldschein market, says Streiter.
As this report was going to press, Fresenius was again marketing a €300m Schuldschein to refinance a maturing one.
Also in the crossover band is HeidelbergCement, rated Ba1/BB+ by Moody’s and Fitch. It, too, is a listed company, but the building materials maker has so far issued only one Schuldschein.
Both HeidelbergCement and Fresenius are among the strongest credits in their home debt market, the high yield bond market. Their ability to issue Schuldscheine does not prove other speculative grade companies, lower down the spectrum, could also do so.
But expansion of the market in this direction is worth exploring.
“I recently spoke to an insurance company,” says Oldendorf at Commerzbank, “which told me that the market was difficult for them because they were still out to their old investors with the promise to generate at least a 4% return. This seems impossible now. That’s why everyone is looking at other asset classes to beef up their returns.”