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Schuldschein eyes Italy and Iberia as green shoots appear

By Silas Brown
17 Jun 2019

FRANKFURT PRIVATE DEBT ROUNDTABLE The Schuldschein market has kept up its momentum across Europe and elsewhere, but two regions have been curiously quiet. Iberia and Italy have implied investment grade borrowers well suited to the market, yet only a few have been tempted to use it. Are there barriers to entry and how can they be overcome?

PD 2019


The Schuldschein market has kept up its momentum across Europe and elsewhere, but two regions have been curiously quiet. Iberia and Italy have implied investment grade borrowers well suited to the market, yet only a few have been tempted to use it. Are there barriers to entry and how can they be overcome?

On the topic of green issuance, market players feel the Schuldschein is well suited to it. Certainly all green Schuldscheine to date have been comfortably placed, but as there are few green investment portfolios, pricing has not yet moved for issuers. Will that change in the coming year?

GlobalCapital invited prominent Schuldschein participants, including bankers, investors and issuers, to a roundtable in Frankfurt, the home of the Schuldschein market, in May to discuss these topics. A leading digital platform also attended to set out its stall — and answer the market’s questions.


Participants in the roundtable were:

Klaus Distler, head of corporate debt capital markets, Helaba 

Sebastian Glock, co-founder of VC Trade

Michael Lamla, head of corporate banking, Agricultural Bank of China Frankfurt branch

Fabian Lander, head of corporate finance and sustainability, Volkswagen Immobilien 

Patrick Mannl, director, debt capital markets origination, UniCredit

Laurent Nittler, relationship manager, corporate and investment banking, China Construction Bank

Irene Öhlinger, debt capital markets, corporates, Raiffeisen Bank International

Silas Brown, loans and private debt editor, GlobalCapital (moderator)



NEW SECTORS AND MARKETS

GlobalCapital: The Schuldschein market is very popular internationally, and has maintained an impressive volume of issues from debut and international issuers for the past three years. Where is the most fertile ground for arrangers to search for new borrowers this year? 

Irene Öhlinger, Raiffeisen Bank International: Central and Eastern Europe was definitely a region we focused on last year. There are really a lot of issuers keen on the Schuldschein there. They like the simplicity of the product and the lean documentation and process. Also these tend to be the issuers well established in their industries, so they bring a lot of value to the Schuldschein investors. But in terms of growth for this year, we see significant interest from southern Europe, namely Italy and the Iberian region. 

GlobalCapital: We’ve seen Pirelli, and we’ve seen Buzzi Unicem from memory, but there have only been a few from those countries.  

Patrick Mannl, UniCredit: Buzzi had been active in the market via its German subsidiary Dyckerhoff years before. In 2017 they decided on a dual structure, where Dyckerhoff issued with a Buzzi guarantee, with the other guarantee just from Buzzi solo. 

This was the first transaction after the tax regime change — in the years before there were a few, but they didn’t issue directly via Italy.

PD 2019For Pirelli, it’s very interesting, and I think it was a similar experience with other international issuers: these issuers aren’t doing Schuldscheine simply because it’s a Schuldschein and it’s become a prominent funding instrument. They are doing it because they save a lot of money. 

They are always looking at the Schuldschein market versus the secondary market in bonds, deciding on one or the other. If you’re in a situation where you can save up to 70bp like some of these names, why wouldn’t you go to the Schuldschein market?

Of course, what has made that easier in the past few years is you can now do €500m-plus transactions, which is often a trigger for larger names. 


GlobalCapital: But if the pricing’s there for Italian issuers, what has prevented the bulk of them from doing it already. Familiarity? 

Mannl, UniCredit: We saw the first transaction in France five or six years ago. If you have a track record of five or six transactions from that country, it’s only a matter of time for the seventh, eighth and ninth to come. Italy is still young in that respect. 

Öhlinger, RBI: Italy has been very much a closed market, where a lot of funding took place locally. Of course, it takes time for these issuers to acknowledge, and they may have to pay a little more over local funding initially, but they’ll start to appreciate the Schuldschein instrument for the additional benefits, like access to new investors. 

GlobalCapital: Klaus, from your perspective, is accessing new investors the most attractive selling point for debut names, apart from pricing? 

Klaus Distler, Helaba: With the Schuldschein market you can broaden your investor base, as well as find a new source of funding beyond bilateral and syndicated loans. This is not just in Germany, where the Schuldschein is well established, but across Europe and other parts of the world. Last year we had over 100 issuers and roughly 50% were new issuers. 

Fabian Lander, Volkswagen Immobilien: If I understood you all correctly, a Schuldschein issue can price more tightly than bonds. But in my experience, the arranging banks tell me that the basis for pricing a Schuldschein is the secondary bond curve. In our latest transaction, we priced it a little tighter than Volkswagen’s curve, and I couldn’t understand why. Last year, it was priced a little wider, and then the arrangers told me it was to do with the illiquidity of the instrument, but then this time some investors said they couldn’t buy our Schuldschein because it was too far inside our bond curve. 

Mannl, UniCredit: Of course, that’s interesting. There are situations like this where you have an external rating where a bond is cheaper or wider, in particular when the borrower is in the triple-B area. It’s slightly more difficult to find the market environment where this is true for a single-A company.

Distler, Helaba: At the beginning of this year, you had heavy widening in the bond markets, and so the Schuldschein became more attractive — but this has changed now. Whether you can price a Schuldschein inside or outside your bond curve depends on ratings, and timings, and the comparative liquidity in each market. We’ve had pricing compression in the last few years. The median spread for five years was 100bp in 2017, and then in 2018 it was 85bp. This year it’s back up to around 95bp. This is largely derived from the bond markets. 

Mannl, UniCredit: If you look at some French issuers in the market, there was a huge arbitrage in their Schuldschein transactions compared with their bond prices, where the Schuldscheine came tighter.

GlobalCapital: Fabian, what attracts you to the market? You said that pricing was quite attractive versus the bond markets. But is that it? 

Lander, VW Immo: For our funding requirements, a vanilla bond is too expensive, particularly documentation-wise, as we need less than a benchmark size. Our requirements, as a small and medium sized enterprise within a larger blue chip, are usually around €100m to €200m a year, so the Schuldschein is perfect for us, liquidity-wise. 

The granularity of a Schuldschein is a massive positive, compared with term loans. Industry and group limits due to high exposures will be mitigated, as the ticket sizes of Schuldschein lenders are usually smaller compared with term loans. 

For us, a green issuer, it is essential that we provide green capital for green assets. It is part of our holistic sustainability approach and our corporate DNA. We think green SSD increases the credibility of our sustainability strategy, broadens our investor base and is a perfect complement to our funding sources.

GlobalCapital: Michael, back to the original question, what would you most like to see more of in the
market, in terms of region and sector?

Michael Lamla, Agricultural Bank of China: With regard to regions we are pretty open but we want to know the clients we invest in, not necessarily for cross-selling, but for credit risk purposes — this is particularly important if you keep situations like Steinhoff in mind, which we weren’t in, luckily.

That’s why we cover Europe from different branches. In terms of sector, we are very open. We don’t have any sector we exclude, however we need to understand the business model. Things like biotechnology, for example, where we don’t have any specialists, we might find hard to invest in.


INVESTMENT APPROACH

GlobalCapital: Laurent, Schuldschein investors are known for their credit work, so perhaps it’s
antithetical to think they’d rule out certain sectors. What’s your investment approach? Is it similar to Michael’s? 

PD 2019Laurent Nittler, China Construction Bank: We can operate in all European countries, thanks to our European passport. We have several branches across Europe, that communicate with one another, and we don’t have a strong focus on any particular country. But, of course, most of the action comes from Germany, Benelux and France. We have a young portfolio — we don’t have a portfolio that has existed for 20 years, so we don’t have long relationships. Most issuers are new clients for us, so we have to work out what their business model is, what’s their approach and who are their clients. One challenging thing is that most issuers don’t have an external rating, which can be difficult, especially when the market’s very busy and transactions, especially from Germany, can close in a matter of days.  

GlobalCapital: At the time of this roundtable, there are roughly 20 transactions in the market, which is very busy. For you, is that difficult to process? 

Nittler, CCB: January was kind of slow, and now everything’s going on! Our workload depends on whether there’s a peak. We try to analyse everything, but sometimes we have to find a compromise.

We may be a global bank, but in Europe we are young and new, so we have to do whole credit portfolio analysis.

GlobalCapital: As a Chinese bank approaching new issuers, when you buy a Schuldschein, do you
consider the idea that this may develop into a longer lending relationship?

Nittler, CCB: For us and most Asian banks — and tell me if you agree Michael — the Schuldschein issue is a door opener to get to know the customer. 

Lamla, ABC: At Agricultural Bank of China, we have local credit approval, which is why we can be pretty quick at committing, compared with other foreign banks. Also, it is not compulsory for our customers to have a link to China, which is why we have also what I call German-German customers — with local activities such as construction, manufacturing, utility etc.

Lander, VW Immo: May I ask a question? What is the proportion of investors that are German? My feeling is the majority is still German? In our last transaction, we didn’t see any, say, Italian or French lenders.

Öhlinger, RBI: In the CEE region, there are investors interested. You have banks that are highly liquid in the Czech Republic, Slovakia and Hungary, for example, and even further east. Of course, their pockets are less deep. 

Distler, Helaba: There are good reasons for this. One is that they already know their clients on their home turf. But also, funding costs. It makes less sense for those CEE lenders because of their relatively higher funding costs, from the east. So investing in the Schuldschein at lower prices is harder for them. 

GlobalCapital: People constantly talk about debut issuers, but are there more new investors accessing the market? There are already some lenders from Latin America, and many from Asia. But are there more to come, Klaus? 

Distler, Helaba: Yes, absolutely. But you have to first ask, why are these overseas investors coming to the Schuldschein market? Why are Asian banks so heavily represented? That’s because the Asian guys are based in Europe, and they have a linkage therefore to the Schuldschein market. Investors also tend to follow issuers from their region, too. 

Nittler, CCB: With the Schuldschein instrument, we had a long learning curve inside our bank, especially for our credit committees, which are still majority Chinese. We as European bankers have to explain the different European instruments, and that’s sometimes hard when there’s negative publicity. 


GREEN SCHULDSCHEINE

GlobalCapital: Let’s move on to sustainable finance. The green Schuldschein has become something of a theme over the past few years, but it hasn’t turned into anything near a groundswell. Patrick, is there a particularly hopeful future for green issuance of Schuldscheine? 

Mannl, UniCredit: Funding is not only about funding — you want to tell stories to your stakeholders. If you want to be seen as a digital company, you may look to join digital platforms. If you want to be a sustainable company, you try to do something green. That is the main driver so far.

But this doesn’t come from the investor base, but from issuers. At the moment, green transactions do not get an increased investor base, so the pricing cannot be different. Therefore, why should companies that are not eager to tell stories create more cost to do a green issue, and at the end have the same result?

GlobalCapital: Well, we are fortunate enough to have a green issuer here. Fabian, what’s the story?

Lander, VW Immo: I think there is a considerable need for green financing. In order to finance EU climate and energy policy alone, additional annual investments of around €170bn are required in the areas of maintenance, energy-efficient buildings, renewable energies, infrastructure and much more. Green products are the perfect fit. 

It’s right, in the Schuldschein market you don’t have significant green funds that directly invest and only invest in green Schuldscheine, but for some investors the green element is the trigger. This is my experience — some investors were attracted to our transaction because of the green nature of the loan.

Why do we go green? Sure, it’s the story — quite simply we plan and develop green assets and operate them in a green way, and green financing is like the last piece of the puzzle. That’s why we have an ESG rating, to show we think green, that our corporate DNA is green — otherwise we would just go to the VW treasury and say we need money! 

GlobalCapital: Michael, you have a very long experience in the market — will there be green portfolios? And will there be a pricing distinction? 

Lamla, ABC: Certainly, there are green portfolios, and there will be more. Will there be a pricing distinction? I’m not sure. Regardless of the portfolio, banks have funding costs, risk and administrative costs, which you can’t ignore. But there are also other aspects beside green financing. Our branch is, for example, involved in social projects such as education.

Öhlinger, RBI: Silas, you pointed out it’s just a trickle of issuance so far — but there is definitely demand from issuers. They’re not just interested in green, but ESG financing. The topic is clearly becoming more prominent — every issuer wants to know what it’s about and how it works. There’s a lot of interest, regardless of whether it’s just marketing or if there is also a pricing benefit. Also, we see a lot of initiatives at the EU level, so though I fully agree that there is no pricing benefit at the moment, this might change in the medium term, e.g via tax benefits — or, to put it the other way, there would be a pricing disadvantage for non-green issues.

PD 2019

Distler, Helaba: I believe we will not see pricing differentiation, because we are already at such a low level. How do you differentiate 2bp or 3bp? It doesn’t really play well, especially when we usually work in steps of 5bp in the Schuldschein market. Looking at the investor base, bank lenders do not usually have green pockets — but banks are looking for sustainable financing, so perhaps they’d prefer to lend to a company that has sustainable goals. 

Lamla, ABC: Also, we have to keep in mind, that not every issue can be green. We have many industries coming to the Schuldschein market which are simply not green, like pharmaceutical, telecommunications or engineering.

Lander, VW Immo: But that’s not the point. Of course you can finance green companies with green Schuldscheine, but if they are already green that won’t make much of a difference. The real ambition should be toward financing brown companies, if they reach certain ESG goals. We have to bear in mind that roughly 70% of worldwide CO2 emissions come from around 100 companies.

Nittler, CCB: It’s great that we’re having this conversation now. On a global level, discussions about green financing are open. Even if there are just questions, that’s great. I am from Luxembourg, the home of green bonds. The government of prime minister Xavier Bettel wants to further develop green finance, which will be a key focus of the Luxembourgish finance industry. But these discussions are going on on a corporate and political level across Europe. 


DIGITALISATION

GlobalCapital: Another theme that has been brewing in the Schuldschein market is digitalisation. We have one of the co-founders of a leading platform here. Sebastian, what drew you to the Schuldschein market? Why this old-fashioned German loan market? 

Sebastian Glock, VC Trade: Well, we started in 2016. Me and my co-founders, who have banking backgrounds, sat together and thought about the product. It is a manual process, filled with people doing manual things, with a lot of information and communication needed. There’s a large workload and a lot of costs, and fees are not increasing. We thought there must be a gap here.

PD 2019

Also, from a regulatory perspective, it’s a loan so it’s rather easy to handle. Our first transaction was actually a green transaction, with Verbund, and we also had one with VW Immobilien recently.

In answer to a previous question, we don’t exclude particular industries, sectors or issuers from our platform, but we rely on the quality assessment of the arranging banks and will introduce a preference option where investors can say they’re only interested in, say, pharmaceutical and automotive issuers. We’re aiming to make life easier for all participants. 

We just heard from Laurent that the process of investment is lengthy, as credit work is tricky, and we agree, which is why we have teamed up with Scope Ratings. If an issuer wants a rating to attract investors, this is available via VC Trade.

GlobalCapital: As Sebastian says, VW Immobilien did a transaction via VC Trade. How did you find it, Fabian? 

Lander, VW Immo: It’s very topical, digitalisation. I’m very comfortable with it, as it’s gives you much more transparency. Just using Debtdomain, for example, you need to ask the arranging banks for the order book. Whereas with VC Trade, you see it live on the platform, the current order book, and any question raised by investors — and you can answer directly if you so wish. However, in my experience, if you give investors the chance to choose between the new way and the old way, they’ll choose the old way. 

GlobalCapital: We have two investors here. I’d be interested to know how many digital platforms have approached you? 

Lamla, ABC: We have been approached by six or seven, and we are working on three. But the digital platform is not the decisive factor. The key point will always be the issuer, the company and can we be of benefit. If this fits then we’ll invest, through whatever IT system.

Nittler, CCB: We’ve been approached to sign up for different digital platforms by the arrangers. We have good relationships with them and want to continue our good collaboration. There are transactions just sold on one platform, which will force investors to sign up for multiple platforms.

We are open to those new trends and we also think there will be more and more transactions marketed on a single digital platform. It is difficult to predict the future, but digitalisation is also a major topic in our industry. We are ready for it!

GlobalCapital: UniCredit, as far as I know, is watching the digital developments from the sideline so far. What’s your perspective? 

Mannl, UniCredit: Let’s wait and see — we are observing the progress of digital platforms. A lot of issuers are asking about them, obviously. There is no doubt digitalisation is a necessity for banks, but from an issuer and investor perspective, as long as we have several platforms I don’t see much value being added to the market.

This is especially true in a challenging market, where marketing is much harder and an arranger’s role is more important. We are a good distance from borrowers being able to do their own thing in the market, far away from that. We, as a bank, have looked at every single platform to understand the phenomenon further — we’re keeping a close eye on progress. 

Glock, VC Trade: We at VC Trade are very clearly in favour of having arrangers in the game, and we’re maybe the only platform like that, that’s also independent. 

I don’t see any benefit in arranging banks becoming excluded. Banks add so much value to the process, when it comes to structuring deals, advice on tranches and market timings, and the first line of defence if a deal gets into difficulty. 

We speak to many CFOs, and none of them say they want people on their teams spending all their time answering investors’ questions. Also, arranging banks underwrite transactions to give the deal added security. 

We have never pretended to be a better bank or adviser than banks or advisers — we are an infrastructure provider for digital issuance, providing transparency for the issuers, heavy efficiency gains for the arranging banks, and a streamlined process for investors, as well as providing access to ratings where wanted. 

Clearly investors invest in an issuer, and whether they do that via a digital platform is not the most decisive question. But it makes the process quicker and safer, and reduces some of the marketing time.

Öhlinger, RBI: Transparency is really important, don’t get me wrong, but it’s something you have to explain, clearly. Let’s say we did a transaction in 2015 or 2016, when the market was in completely risk-on mode, and now the issuer is doing a transaction, when it is slower and harder to gauge — someone has to be there to explain that the borrower shouldn’t be afraid. It’s not like autonomous driving — that can’t be the final stage, because the transactions are too difficult.

Glock, VC Trade: I fully agree, that’s why we need arrangers. If there is something difficult in the market, arrangers are there to help and explain. Other platforms eliminate the arranger in their vision, we don’t. It’s very common to have in new technologies an over-disruption. 

PD 2019Lamla, ABC: I think digital platforms can allow for autonomous driving. A prerequisite is that everyone has a limit and a credit view, so that no further explanation is necessary. With ABC, we’re looking at specific situations and structures, problem solving and sometimes go against the mainstream. For example, we enlarged our automotive portfolio at the end of last year. This is where you need more contact, more exchange and dialogue with the issuer, while platforms become secondary.

Öhlinger, RBI: I fully agree. Platforms are a facilitator, and I don’t see a threat that arrangers will be replaced. Of course, there may happen to be one or two cases where an issuer is very sophisticated and can do the entire process. 

The only problem is that it’s another drive that puts pressure on fees. If the issuer believes that the platform makes arrangers’ lives so much easier, then he may think we should do transactions at half the price — and that, to be honest, is not what the platform does. 

It makes the process easier and streamlines it, but the majority of our services are elsewhere — structuring, advising and negotiating the documentation, and also having dialogue with investors. 

Glock, VC Trade: In none of our slides will you ever find us saying we’re looking to reduce arrangers’ fees — we are not committing suicide. What we do say is that our platform can make smaller issuances possible. If you can do smaller issuances more often because a standardized process is cheaper it will save liquidity costs for the borrower — arrangers’ fees are not the largest costs, it’s liquidity costs that are key. 

Distler, Helaba: Also, we have already gone through fee compression. I was asked earlier why we are playing with VC Trade, and I think as we’ve done most of the transactions on it, we are clearly the ones pushing it. 

The answer’s very easy — now, after a year, we’re in a situation where we can book trades directly into our systems, we’ve plugged our systems into theirs so we don’t have our sales teams booking all night long. 

If you have a Lufthansa transaction with 150 investors, that takes time, and this time is clearly eliminated. Also, communication on the platform is more efficient. Back then, every arranger put every order into the order book, then you have to sort it out — just inefficiency all over the place.

Mannl, UniCredit: Competitors are creating their own data platforms, and everyone is trying to get the first transaction done. So then, you will see fee discussions back in the market. If there’s a pitch competition and others are trying to win, it will always become about fees. 

GlobalCapital: My understanding is that fee compression came before digital platforms?

Mannl, UniCredit: There is no end point. If you have more banks just wanting to market their own platforms, you’ll get a fee discussion.

GlobalCapital: Klaus, if you look at the proliferation of platforms, will there be consolidation? What will the outcome be?PD 2019

Distler, Helaba: It’s like reading a crystal ball, which is difficult. We clearly decided to use VC Trade because it’s a marketplace. There are now nine banks on it, and it offers a good number of transaction for investors — this is the key. 

Why should a bank’s proprietary platform survive? There may be one or two platforms in the market, which may help competition, but we don’t need the number we have right now. With VC Trade, you have more than 400 investors signed up, which is basically all the main investors. With Lufthansa we had an order book of €1.3bn. 

GlobalCapital: Lufthansa was sold only via VC Trade, which was an effective way of getting investors to sign up. Will you use that strategy again?

Glock, VC Trade: It’s true that if people have a choice, they will stick to their old habits. We don’t expect to change the market overnight. Exclusivity clearly drives people on to the platform — for example, roughly 100 investors signed up because of Lufthansa.

We believe in the open market model, because if you have nine arrangers, and perhaps more to come shortly, it means many deals are multi-arranger deals, and then the arrangers get all those efficiency gains previously discussed. On proprietary systems, you can’t really have multi-arranger deals. We would like to see as many investors and arrangers in the market on VC Trade as possible, and we try to create a system where efficiencies are gained for all in the market. But we expect more than one platform to survive.

GlobalCapital: Of course, with fragmentation another option would be to merge with another platform? 

Glock, VC Trade: We need consolidation, clearly, but whatever this ends up with will take a bit of time to figure out. We have the biggest investor and arranger base, but I think we’ll have a clearer picture by the end of the year. 

Mergers, to your question, why not? It’s not on our topic list right now, but whatever benefits the market to be truly functional, is what we’re aiming for. Investors don’t want to onboard on four or five platforms, that’s the opposite of functionality. 

GlobalCapital: Interesting. So you’re not averse to the prospect of merging.

Glock, VC Trade: Why take anything off the table?

GlobalCapital: We haven’t talked about regulation. As digital platforms rise, the popularity of the market grows, and there is an increase in secondary market activity, will regulators like Bafin and Esma look at the market more, and is that necessarily a bad thing?

Distler, Helaba: I think the European Commission is interested in a functioning private debt market in Europe, and clearly the Schuldschein market has developed into an efficient and acceptable example, with €25bn-€30bn of issuance yearly. With the Schuldschein, unlike other initiatives, one clear goal of the EC has been achieved.

The platforms haven’t changed the market, so I don’t see why regulators will look into it. The platforms are facilitators, and the investors remain buy-and-hold. There won’t be more secondary market activity because the investors’ characters won’t change — I’m not afraid at all that regulators will look.

Lamla, ABC: I fully agree. We buy bonds to manage our liquidity, but Schuldscheine and bilaterals are there to provide a service to a client, which means long term commitment.

Öhlinger, RBI: What Klaus points out is very important. The regulator looks at all types of markets, and has a good reason to do so. Though there are more issuers, investors and arrangers, the Schuldschein market, the instrument and the legal requirements haven’t changed. 

The regulator’s focus should always be on how to ensure a functioning market, and not how to impose further regulation on a functioning market. 


SECONDARY MARKETS

GlobalCapital: Do you think if secondary market activity were to increase, which I admit is once again crystal ball gazing, that would provoke some form of regulation? 

PD 2019Distler, Helaba: Why should the regulators look? If they wanted to look, they should have looked 10 years ago. There’s not more activity in secondaries than there has been in the last 10 years. Also, in the loan market there is a lot of secondary activity, and their market is far larger — so why should the regulator just look at Schuldscheine? Occasionally, when an investor has stopped liking the industry or the credit risk, he may decide to get out — but these instances are very limited.

Lamla, ABC: Eighty percent of the secondary offers we see are on a silent basis. Investors approach us because we have a reliable pre-screening with a quick decision process. Thus they don’t have to broadcast their sale.

Mannl, UniCredit: Hamburg and Hanover stock exchanges tried to invent a secondary market, but the transferability is quite limited — we’re talking eligible third parties, which more or less defines the scope of the market. 

There are a lot of reasons why these attempts did not work. As you mentioned, transferring is within the documentation. If bank A is contacting you because for whatever reason they want to pass on the loan, that isn’t necessarily secondary market activity. We have to be careful when we talk about secondary market activity, or secondary market trading, because this is just a transfer from one party to another. 

Glock, VC Trade: We saw that attempt in Hanover and Hamburg. A Schuldschein is a loan is a loan is a loan. We are not building a secondary market because there is no need for it. When we hear some competitors talking about that, we strongly advise against it.

Mannl, UniCredit: I can remember 12 or 13 years back, when we had our first transaction. We dealt with, and still deal with, family-owned companies, and if we told them there was a secondary market they would rather shy away from issuing a Schuldschein. We spend a lot of time creating and defining black lists, where a borrower doesn’t want certain investors to be contacted.

Lander, VW Immo: From a totally different perspective on regulation, and about buy-and-hold and buy-and-manage, I hope the regulators would look into privileging green private debt instruments, so the capital requirements would become lower compared with standard Schuldscheine — that would push green Schuldscheine and it would become an instrument to fund green investment. This is what the regulator should focus on.

Mannl, UniCredit: If you look at all the discussion surrounding climate change, this is a logical next step.

Lander, VW Immo: Five years ago there was a green premium, now it’s on par, in five years it will be inside.

GlobalCapital: As the Schuldschein market becomes more international, why does it remain relatively sheltered from global economic events? Why does this private debt product remain fairly isolated? Does anyone have a brilliant answer?

Mannl, UniCredit: There is no brilliant answer. However, let me add some colour through an experience with an Italian issuer — they issued a bond in early 2018 and three or four months later they did a Schuldschein.

Within those three or four months there were a lot of local problems with the Italian government, and secondary market volatility was largely down to that. When you have a market where investors mark to market, macro events are in the accounts. 

When you have a market where investors don’t mark to market, you don’t have to put macro events in your calculations. That is the reason for many international companies tapping Schuldscheine.

Lamla, ABC: The Schuldschein is a commitment to the client. Bonds, you buy for liquidity purposes — you have external ratings and daily pricing, which makes them easy to sell. With the Schuldschein, the main part is to be a bank with a client relationship, where you support the client and are there for the long term.

Nittler, CCB: We have a small portfolio of bonds, but with the Schuldschein it’s a long term commitment.

Öhlinger, RBI: Buy-and-hold investors look at the underlying credit — whether Mr Trump tweeted something last night doesn’t impact that credit over five, six or seven years.

Nittler, CCB: Credit analysis will not be that different. We have confidence in our pre-screening. When we go to our credit committees we go because we believe in the business model, and that even if there’s some negative announcement it will not impact our credit conclusions. 

We strongly believe in the advantages of a borrower we lend to in the Schuldschein market, and believe that the risk will be well mitigated.

GlobalCapital: But interestingly, you don’t get illiquidity premiums in the Schuldschein market for the longer term commitment.

 Öhlinger, RBI: With unrated bonds you have funds that ask for illiquidity premiums, because they would have a problem sitting on something they can’t manage as they could manage a rated benchmark transaction. A bank as an investor will not manage its portfolio in such a way. It doesn’t have to mark to market, that’s why it won’t change.


OUTLOOK

GlobalCapital: The second quarter this year has been very busy — do you think this momentum will
continue in the third and fourth quarters? 

Distler, Helaba: I’m optimistic for 2019. We had a slow start but now we’ve sped up, and the volumes are significant so far. There are more M&A transactions to come, which brings volume and new issuers too. I believe we will see a sufficiently well balanced market over this year. In March and April there were almost too many, and as we heard earlier, that’s sometimes difficult to handle on the investor side. We should reach at least the same issuance as in 2018, if not more.PD 2019

Öhlinger, RBI: We see a very healthy level of activity, a lot of demand from issuers — that’s true especially when bond markets are volatile. I’d expect about the same level as last year — demand from the investor side remains healthy. 

Mannl, UniCredit: We have a steady state at €25bn and then it’s up to whether or not the market can attract €1bn-plus deals. 

Last year we had just one €1bn transaction. If there are Dax companies looking to raise, then we can reach €28bn, which was the 2018 all time record.

There have been order books over €1bn this year, but for whatever reasons those companies didn’t decide to raise that much. There may be more coming to the market, though. Another thing is that this year we might perhaps have more transactions outside Germany than from within Germany.

Nittler, CCB: It’s all down to the French issuers. A lot of those borrowers have the Schuldschein on the table, and they are just waiting for the right moment to launch.

Mannl, UniCredit: You started by saying Frankfurt was the centre of the Schuldschein. Perhaps next year, you will be saying that in Paris. You never know.


By Silas Brown
17 Jun 2019