Schuldscheine: die or defer
The Schuldschein market must adapt if it wants to win back its international borrower base. While competing with public bonds on price may be out of reach, the instrument can take a leaf out of the US private placement’s book and introduce deferred funding.
Delayed draws are commonplace in other private debt markets. They are a nifty feature that public markets find hard to replicate and, perhaps now more than most times, companies are in need of funding security. What better way is there for the market to adjust to that?
The feature is not unheard of in the Schuldschein market already. Delayed draws happen every so often — if there’s a Schuldschein refinancing on the horizon or investors want to push a settlement into a new calendar year. This shows that there’s no fundamental reason why Schuldschein investors can’t adjust to deferred funding.
A few banks, particularly BNP Paribas and LBBW, have been pushing the concept to investors, and have brought a few companies — namely the VW subsidiary Traton and the optic maker Jenoptik — to market with longer settlement dates alongside traditional ones. If this normalises, the market will surely see more deals from companies with an acquisition on the horizon, or a term loan set to expire.
The Schuldschein instrument is known for its flexibility. Arrangers play upon the fact its structure can vary from fixed to floating, and offers a variety of tenors. But as borrowers are drawn back to the bond markets on the promise of cheaper pricing, now is the time for Schuldschein bankers to push its flexible nature that much further.