If the Schuldschein stars align, expect a bumper year
With the traditional investor base taking a step back this year, a return could result in consecutive record issuance
The Schuldschein market is having a record year, hitting €30bn in total volumes by the end of 2022, compared to pre-pandemic peaks of €27bn in 2016 and €28bn in 2019.
One of the drivers of this year's boutant SSD issuance has been the volatility in the public bond markets, which has pushed issuers to look for alternative financing methods. Schuldschein can be a good fit in this situation as a result of their weakened regulatory oversight and ease of issuance. Volume tends to be determined by how many issuers come to the market, and there always tends to be enough demand. If market conditions continue into next year, as many expect them to, next year could be another bumper year for the private debt instrument.
But, despite the record numbers, the year has not been business as usual in the SSD market and its investors have been somewhat different from usual. International banks have been the main investors in Schuldschein deals in 2022, as the core investor base, the Sparkassen or German savings banks, have taken a step back.
International lenders believe that Sparkassen have been having issues with existing investments in Russia and Ukraine, which accelerated funding costs and means they have had to provide financing to their local clients before entering SSD transactions, according to one banker. The combination of the two factors has made it difficult for Sparkassen to invest in Schuldscheine.
So, given the market has hit near-record levels this year, if conditions continue to encourage international lenders to dabble, and a change in fortune for the Sparkassen means they too come back to the Schuldschein game next year, that would be bullish for demand in SSDs, which could polish the market's attractiveness and lead to a new market record.
It is a scenario that could well come to pass. Estimates suggest that Sparkassen this year have been buying only 20% to 25% of their usual volume of SSDs. So, as the market finds new ways of addressing issues related to the supply chain and the energy crisis, Sparkassen are likely to regain their appetite for SSD transactions.
However, even if Sparkassen do re-enter the fray, there is no guarantee that the international investor base that has accumulated over 2022 will continue to show interest.
The margins in the Schuldschein market have been an important factor in attracting these new issuers. Spreads have remained tighter than in the public bond market, however, overall Schuldschein prices have risen recently as the funding costs for investors has increased.
Schuldschein investors themselves are not particularly positive on the outlook for next year and are not given to making wild boasts, with several telling GlobalCapital that they do not expect next year's issuance to surpass the 2022 record. “It will be difficult to copy paste 2022 into 2023,” said one banker.
Concerns relate to the expectations that margins will slightly tighten in the public markets in the new year, which would drive corporates back to issuing bonds. If this happens, the market will once again be reliant on domestic savings banks.
Obviously, there are issuers who do not use the bond market and are SSD loyalists, but the “swing voters”, who have a choice between which market to tap, are the ones that make a difference between a normal, below par or bumper year.
Regardless of the outcome, the potential return of Sparkassen will be helpful for overall volumes, as they should help keen SSD spreads down. However, unless the stars align it will not change the overall picture, as big sized issuers are still required to volumes which are nearly comparable to this year's issuance.