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Tightening in focus after heavy SSD orders

Lufthansa 230x150
By Silas Brown
23 Apr 2019

Schuldschein buyers fear a further round of price tightening is nearing after Continental and Lufthansa both closed transactions that were three or four times oversubscribed. But as investor orders were substantially scaled back in both instances, some are considering inflating their bids to guarantee their desired amount.

Continental closed a €500m deal via BayernLB, DZ Bank, Helaba and LBBW. The three and five year transactions closed at the tight end of the 55bp-70bp and 75bp-90bp ranges. It was, according to two people familiar with the situation, three or four times oversubscribed from its initial target of €300m.

Similarly, BayernLB and Helaba started with a target of €300m for Lufthansa, offering investors three and five year Schuldscheine at 65bp-80bp and 85bp-100bp over Euribor. The deal closed at €800m, but the orders were three or four times oversubscribed from the initial target.

This may give arrangers and borrowers cause to think that pricing could be pushed in a little. 

“What this means to me is pricing will be driven further down,” said a Schuldschein investor from a commercial bank. “If they were both three or four times oversubscribed the arrangers will cut another 10bp or 20bp for transactions like this in the next few months.”

One banker said: "Tightening's being seriously considered for the big German blue chips, as there was such a high demand. So I think there will be a couple of basis points shaved off if another one comes soon."

However, another banker was less sure: “There’s very good supply at the moment, so I think arrangers will be a little cautious about tightening — there are too many options for investors to do that too much.”

Inflation threat

In both transactions, some investors were frustrated with the level of scaling back. 

Two commercial bank lenders said they saw significant scaling back of their orders, and both thought they were scaled back at the expense of savings bank lenders.

“Savings banks place €1m-€2m tickets [substantially less than the typical commercial bank bid] so they can’t be scaled back,” said one of the two lenders. “Also, savings banks are the shareholders of the Landesbanks, so BayernLB and Helaba will make sure these investors will get their allocations. We saw a scale back in both deals of one to four or one to five.”

The lender said next time a transaction like these came around, he would inflate his order to guarantee the size he actually wanted. “If I want €20m I’m going to bid €50m.”

But two bankers felt this practice, imported from the bond markets, would be a step in the wrong direction.

“It's obviously frustrating for any lender to be scaled back, especially in a market where scaling back isn’t too common — but that’s a dangerous turn,” said one arranger from a Landesbank. “Inflating orders is not the right solution — the right solution is for arrangers and investors to communicate better.”

When the second banker was asked whether German cooperative and savings banks’ tickets were protected from scaling back, he said: “That does happen, but that’s also because their tickets are much smaller and so they can’t really be scaled back. Also the smaller banks have no way of buying into these bigger names if not the Schuldschein market, whereas the commercial banks do.”

By Silas Brown
23 Apr 2019