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Wait a second, Schuldschein.

By Silas Brown
24 Aug 2017

With a flurry of fanfare the Schuldscheinbörse Deutschland — the first attempt at a secondary market for Schuldschein loans — launched on the exchange floors of Hamburg and Hanover.

It was billed as a coming of age story. The moment an obscure product came in from the cold. But in a certain Hollywood vein, the idea has, so far, flopped. Some Schuldschein specialists said the bids made on the day the market opened in February are the same bids up on the board today.

The market should be thankful of the failure. The Schuldschein market is not sufficiently protected from vulture funds — apparently already circling the market — piling in to buy the riskier credits, and using the loans' structure to exploit faltering borrowers.

In legal terms, the Schuldschein has a bilateral character — as many as 100 investors can be involved in the transaction, each having a separate relationship with the issuer. There are no majority voting rights, which affords each lender a holdout position, and rights to accelerate if waivers are breached.

Thankfully, the typical lender is a buy-and-hold type and hell-bent on credit work, and the typical borrowers are high quality credits. But if lenders migrate further down the spectrum in search of better yields — and an active secondary market emerges — the market may have to deal with an infestation of carrion feeders.

There is talk of the Schuldschein industry reflecting the US PP’s secondary market model, where a tenth of yearly volume is traded to manage portfolio risk and to shorten or lengthen duration.

But until the Schuldschein market’s documentation matches its US counterpart's in length, it would be prudent to keep talk of the secondary market as quiet as Schuldscheinbörse Deutschland’s trading floors.

By Silas Brown
24 Aug 2017