At Euromoney’s Schuldschein conference in March this year, lenders from as far afield as Asia, Canada and South America were in attendance, asking questions and displaying an energetic curiosity about the instrument.
Over the course of the past five years, non-European lenders have flocked to the Schuldschein market, on the hunt for implied investment grade borrowers at attractive rates.
But non-European borrowers have been slower to join in.
Of course, there are a few notable exotic exceptions. Etihad Airways became the first Middle Eastern company to raise Schuldscheine in late 2016, issuing €209m in euros and dollars. The International Investment Bank, the multilateral development agency headquartered in Moscow, launched a €30m Schuldschein in March 2017, while Israel Chemicals and Brazil’s Petrobras have also issued. And over the last two years
a few US names have entered the market.
But arrangers are confident of further expansion, in particular after higher issuance from non-German borrowers last year and an encouragingly high number in the first two quarters of this year.
“The main advantage of the Schuldschein instrument for non-European borrowers is that, in principle, every corporate, financial institution and SSA is able to issue a Schuldschein,” says Rudolf Bayer, head of UniCredit’s medium term note and private placement syndicate desk in Munich. “According to our internal estimates, around half the volume of Schuldscheine placed this year has been from non-German borrowers — we think we will see more issuers outside the traditional German-speaking regions.”
One arranger in Frankfurt, asked what had held back non-European firms from tapping the market, says: “I think it’s often about the visibility of the product — a lot of issuers don’t know much about it, so our job is to explain the instrument and its advantages. What really helps those discussions is examples of very successful international trades, to show prospective entrants.”
One of these successful transactions occurred in March when Reliance Industries, the conglomerate headquartered in Mumbai, via KfW Ipex-Bank and LBBW launched a €150m debut deal across three, five, seven and 10 years. This was seen by many as a test for the market, and some weren’t sure how the adcredit would play with the notoriously prudent investor base.
On the day that Reliance launched, one arranger from a rival bank said: “This deal is like a fishing expedition: you put your bait out and see if anything bites. But I’m not sure that they will with this one.”
However, many investors did bite.
During an extended marketing period, the lead arrangers sent emails to investors saying that demand had “considerably exceeded” the initial target of €150m, and market sources said order books had closed in May with over €400m of firm orders.
The success of this transaction is no small feat, and many think this will spur other Asian borrowers looking for euro debt to consider the Schuldschein market.
“Reliance is a very important threshold for the market to reach,” says Morris Gutermann, director of corporate origination at Helaba. “Finally we have a larger, very well known company outside the traditional first world areas in Europe and the US entering the market for a large amount.”
Alongside Reliance, Tianjin Railway Transit Group also raised €200m of 10 year Schuldschein notes in May, which was the first transaction from a Chinese issuer.
One investor who participated in Reliance’s deal says: “What this shows is that there are Schuldschein investors out there with a taste for regions that haven’t yet come to the market. It’s India now, but it could be China, or Hong Kong, or Malaysia later, who knows?”
Obstacles to growth
However, to curb this investor’s enthusiasm somewhat, a few obstacles to world domination remain. Firstly, most companies in Asia are not like Reliance, which is rated Baa2 and BBB+ and by Moody’s and Standard & Poor’s, is listed on the Mumbai and National stock exchanges and has a market capitalisation of around $120bn.
“The Schuldschein should not be made to fit potential issuers, potential issuers should fit the profile of the Schuldschein market,” says Helaba’s Gutermann. “An external rating is of great use, of course. Schuldschein investors are of a conservative bent, they want issuers they know about whose businesses they understand. They want a blue chip with the security of a large size and a high turnover — it can’t be a fly-by-night operation.”
Schuldschein lenders therefore may not be as excited by smaller Asian firms, with no external ratings.
There is some evidence for this. Swiss textile firm Saurer, which was bought by the Chinese Jinsheng Group in 2012, held roadshows with Schuldschein lenders in 2017 for a prospective issue. But, according to several market sources, there was not enough interest from investors, so the deal was put on hold indefinitely.
This may be a useful warning for Schuldschein agents.
“You won’t be considered a serious arranger if you think you can place any non-European borrower in the Schuldschein market easily,” says Louai Al-Jaafari, director at Raiffeisen Bank International in Vienna. “You have to think of which investors to target, approach them for soft-sounding, and see if they’re interested.”
Chinese banks have European branches which invest in Schuldscheine, for example, and branches in Africa and Asia and elsewhere that lend in those regions — so they may house their lending relationships with some international borrowers elsewhere.
There is a further issue to address.
The Reliance deal was one of the few transactions to have been issued not only by a non-European company, but via a non-European corporate entity. It is not clear how many investors can buy such deals.
“Many investors in Schuldscheine are only mandated to invest in European entities, which has historically prevented borrowers outside the EU from selling Schuldschein notes,” says an investor.
US companies have sidestepped this hurdle over the past few years by borrowing via European subsidiaries — which could be the answer for other regions.
Sherwin-Williams, the US paints company, closed its debut Schuldschein for €240m in September last year through its Luxembourg subsidiary. And Wabco Europe, an industrial equipment supplier with headquarters in Brussels, launched a €200m debut Schuldschein in February 2018. It was guaranteed by Wabco Holdings, listed in New York.
“This is a good way of keeping the Schuldschein investors on board, while expanding globally,” says an arranger at a German bank. “I don’t see a reason why this would just be for US issuers, and other non-European borrowers should take note.”
The reverse can also happen, where European borrowers issue non-euro debt via non-European entities.
Fresenius US Finance II, a US entity of the German medical services company Fresenius SE, raised $400m in March 2016, with a Schuldschein led by Helaba and HSBC. Before that, Arcadis issued $127m through a US subsidiary.
“Borrowers from the US were all the rage for the past few years, and they helped the idea of issuing via European subsidiaries form. But after US President Trump’s tax changes and cash repatriation, many of those prospective corporates have gone quiet, as their funding needs have fallen,” says an arranger in Frankfurt. “So instead, our focus has turned to other parts of the world, and other parts of Europe.”
Some arrangers think those cooing over non-European borrowers are missing a pocket of growth right under their noses.
“With Italy and Spain, you have a much wider investor group in the Schuldschein market that’s prepared to consider lending,” says an arranger at a German bank. “While other arrangers run around the world trying to find exotic borrowers, we’re just going to get on a train and head south.”
The Schuldschein market has had few transactions from Italy and Spain — surprising, given their proximity and the number of implied investment grade borrowers located there.
“I think in 2014 and 2015, when the Schuldschein was growing internationally, Europe was really still recovering from the crisis, and many investors hesitated with Italy and Spain,” says Al-Jaafari. “But Spain has recovered and there are plenty of international and domestic corporates there, while Italy’s solid corporates have remained strong.”
Issuers from those regions are beginning to creep into the market.
From Italy, standout transactions last year came from Pirelli and Buzzi Unicem, while Spanish infrastructure and renewable energy company Acciona returned to the Schuldschein market in May with a €150m-minimum triple tranche transaction.
However, there is still a catch.
Al-Jaafari notes that the biggest problem comes from relationship banks. “Italian banks are still quite competitive lending to their corporates, so they may have to pay a pick-up of 50bp-60bp to enter the Schuldschein market for the first time.”
This is not always the case, though. For Pirelli’s Schuldschein, the margin ranges were 105bp-115bp, 125bp-140bp and 150bp-165bp for three, five and seven years. Even at the wide ends of the ranges, these spreads are tighter than the loans Pirelli placed in the syndicated market a few years before.
“Expect many, many more issuers from Italy and Spain to come soon,” says one forthright arranger.