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Companies find new ways to link up with alternative lenders

By Jon Hay
17 Jun 2019

PARIS PRIVATE DEBT ROUNDTABLE European private debt markets are developing fast and diversifying — although many market participants would rather they became standardised. The Euro Private Placement market, founded in France, has not blossomed into a rival to the US PP. Many French issuers now travel to Germany’s larger Schuldschein market.

PD 2019

European private debt markets are developing fast and diversifying — although many market participants would rather they became standardised. The Euro Private Placement market, founded in France, has not blossomed into a rival to the US PP. Many French issuers now travel to Germany’s larger Schuldschein market. But when GlobalCapital gathered an Italian issuer, two French investors and three private debt bankers in Paris to discuss the market, it was clear that the private debt options available to companies are now much more varied and attractive. 

Yet there is still a deficit of clarity — companies could be more clearly informed about possibilities, and still sometimes find investor needs opaque. One essential question is whether private debt markets genuinely offer alternative views on credit and pricing, from what issuers can find in public markets.

Participants were convinced that disintermediation will go further but disagreed on whether the Schuldschein market is truly disintermediated, given its reliance on banks. They also questioned how efficient execution is in the various markets, and what will happen to direct lending when the next downturn comes.

Participants in the roundtable were:

Michael Bures, head of debt capital markets, corporates, Raiffeisen Bank International

Frederick de Graaf, corporate debt capital markets origination, France, Helaba

Salim Hasnat, managing director, private debt France, Muzinich & Co

Patrick Klein, group treasurer and financial controller, Buzzi Unicem

Edouard Lemardeley, head of debt capital markets France, UniCredit

Thierry Vallière, global head of private debt group, Amundi

Jon Hay, GlobalCapital (moderator)


Private debt in the corporate landscape

GlobalCapital: The Schuldschein is an ancient market, but private corporate debt really came to prominence after the crisis. That’s quite a long time ago now; things have moved on. How has private debt evolved as a part of the corporate finance landscape?

Michael Bures, RBI: Well, the English say the proof of the pudding is the eating, and the proof of the private debt markets is the issuance volume. We can clearly see a positive trend in all the markets. Last year, US private placements nearly hit the $100bn mark, Schuldschein had around €25bn, the third best year ever. Euro private placements had €8bn, which was a decrease from the years before by number of deals, but still 10%, 12% growth compared with 2017. So obviously treasurers and CFOs have come to these markets in much larger quantities.

Our clients changed their behaviour after the crisis. Before, there seemed to be liquidity in abundance and many thought they’d rather save the commitment fee and rely on uncommitted lines. That’s totally gone.

They started to focus much more on avoiding funding mismatches, no uncommitted funding any more, committed lines always available, being much more conservative. 

Nowadays corporates have a lot of opportunities. They can tap the Eurobond market if they have a rating, they can go to the French PP or Euro PP market, Schuldschein without a rating, there’s a local bond market in Austria, US private placements. It’s good to be a treasurer right now. You can choose and optimise your funding mix.

GlobalCapital: Patrick, you’ve issued bonds, convertible bonds, Schuldscheine, US PPs — is it good to be a treasurer? 

Patrick Klein, Buzzi Unicem: Well, it could always be better. It depends  very much on which company you’re working for, especially if you’re in Italy like us. A couple of Italian issuers have been going through tough times — you’re penalised, no matter where your revenues come from. The location of your headquarters and your listing trigger a different cost of funding and a different perception among investors. 

PD 2019But having said that, yes, the markets, especially in the last couple of months, have improved quite significantly.

Bures, RBI: Yes, in November, December the mood was not so good. In January, February, even seasoned Schuldschein bankers were not so sure where the market would head, and even more so the Eurobond market, because there had been a significant correction starting at the end of September.

Many of us are positively surprised about the shape of the markets now, Eurobonds and the Schuldschein market. Many were afraid at the beginning of the year that it would take much worse turns and now it’s really good in all these markets.

Thierry Vallière, Amundi: The disintermediation process is a long term trend. 

Just after the crisis, there was a lack of liquidity, banks became very constrained by national and international regulations, so their cost of capital increased a lot.

But companies still need to invest and start thinking about diversifying their funding. And they are interested in various things — maturity, amortisation profiles, ease of execution. Those aspects are covered by disintermediated products or private products.

And investors with long term liabilities to meet are facing a huge investment challenge, because of unconventional monetary policies, which have had adverse consequences for most asset classes.

In the corporate bond market, today only 23% is trading at yields above the inflation rate. Only 15% is trading above 2%. So your investment universe is really, really small in the public market.

Against this backdrop, private debt offers several benefits for investors with long term horizons and able to bear some liquidity constraint, because you can have some pick-up, diversification and low volatility. 

So all those aspects help — the lack of financing from banks, the needs of corporates and also the investment challenges for investors.

Edouard Lemardeley, UniCredit: It depends on which private market we’re talking about. The Euro PP market hasn’t really started yet, it’s still very small. It’s a young product. The private debt flows are mostly in the Schuldschein, which is by far the deepest one in Europe.

Vallière, Amundi: The Schuldschein market is not dedicated to institutional investors — we cannot compete. The market is made mainly for regional German banks...

Lemardeley, UniCredit: International banks more and more, Asian banks...

Vallière, Amundi: … or banks that can use the asset as collateral for their refinancing.

I’m not saying it’s not an interesting product; obviously it is interesting if you are a corporate issuer, because you will have access to a very cheap cost of financing. But you will not diversify your investor base, except you might find some other banks that you don’t have in your syndicated loan.

But for an institutional investor like our clients, they see no point, no relative value in investing in this product, because they can have access to liquid products with exactly the same underlying credit quality, with more or less the same quality of documentation, which is today very limited…

Lemardeley, UniCredit: In my opinion, the Schuldschein can be more investor-friendly, on average.

Vallière, Amundi: … but they will have the liquidity. So, it’s very difficult for institutional investors to find an interesting business model around this asset class. And this is why you see so few investors, like asset managers, investing in the Schuldschein market.

Lemardeley, UniCredit: I think the Schuldschein, at least for non-domestic issuers, is pure diversification. If I take the example of Iliad, we are about to close the transaction — they were able to address very different investors from those in a public bond, which they had done before, or in their revolving credit facility.

Vallière, Amundi: This is a perfect example — if you look at Iliad or other French issuers that have issued Schuldscheine recently, you can buy exactly the same credit on the public market with a higher spread.

Lemardeley, UniCredit: But not under the same terms. I think this is the bargain, the Schuldschein is a hybrid solution between bond and loan. But institutional investors don’t precisely value the legal terms.

GlobalCapital: Salim, Muzinich is obviously quite different from Amundi, and yet you’re not a bank lending in the Schuldschein market either. So, what is private debt for you?

PD 2019Salim Hasnat, Muzinich: Well, the world has turned to a disintermediated one. Banks slowed down the deployment of capital just after the financial crisis, leaving some space for private debt investors like us to co-operate with the banks, or to play leading roles and deploy capital into the economy. 

And now that issuers have had the taste of private debt, they don’t want to turn back. They see other characteristics it brings, like flexibility, and they want to have a choice between different players — banks, public markets, private debt. 

And they are very smart at understanding the key elements of each player. They have access to an ecosystem, like debt advisers, so as to get the best of what the market can bring. 

Private debt has reached about $769bn globally of assets under management; this will be the fourth year in a row that over $100bn will be raised in new commitments. So it has really created a new asset class.


Disintermediation: further to go?

GlobalCapital: Frederick, do companies still need to be persuaded of the need to move their funding away from banks, or has every company now already done it?

Frederick de Graaf, Helaba: When we speak to companies, there’s still a growing demand for private debt. We’re specialists in the Schuldschein segment — it is getting more and more international, on both the issuer and investor sides.

Since 2011 the volume has considerably increased. French clients have got a big demand for it. 

Thierry will disagree with me, but I’m convinced that for issuers it’s really a diversification of the investor base to issue a Schuldschein.

By issuing a Schuldschein, the advantage for the company is to find funding from international banks and investors without impacting the limits of the banks which are in the company’s RCF. 

Generally for French or non-German issuers, there are about 30% to 40% Asian banks investing in the Schuldschein.

Lemardeley, UniCredit: Is it the end of disintermediation? Yes probably for bigger corporates, because I think their funding mix has now stabilised. But the question is, especially in Europe, for smaller corporates…

Bures, RBI: We still find lots of first time issuers in the Schuldschein market. And when we talk about disintermediation, look at the loan market. This year, the volumes in the club loan and syndicated loan markets have shrunk dramatically. It’s most dynamic currently in the Schuldschein market and the Eurobond market. Banks would like to lend again, but the demand is not there from the corporate side.

I think the lesson has been learnt. Hardly any CFOs or treasurers put all their eggs in one funding basket any more, I hardly ever see that.

GlobalCapital: Patrick, you have a lot of funding baskets — what is your philosophy on loans, bonds and private debt. Is it all about the cheapest cost of funds?

Klein, Buzzi Unicem: Well, cost of funding can be a big issue. We have come down, over five years, to a 2% average cost of funding from 5% or 6%. 

But there is also a medium or long term development. We still have bank funding, but we have become much more selective.

Why? Because now with the ECB’s new Targeted Longer Term Refinancing Operation, there is a lot of interest by banks to lend, up to four or five years.

But because bank fees are not very high in Europe compared to the US, they couple these loans with other services they want to sell.

And then, if you have a few core banks, it becomes very complicated to manage, because you always have to think, when you do something, about who you can do it with. 

That’s one of the main reasons why a lot of corporates nowadays, even if they want a bank loan, they do a Schuldschein. You can do something with banks you do not have a relationship with.

There are a lot of different products, and we would like to participate in some of them. But it’s not yet clear, it’s still fuzzy. We’re still waiting for some clear indications from arrangers and investors.

To give you an example, in December and January I did several meetings with investors, Italian, UK, German and French.

I discussed with them private placements. I said, ‘What are your possibilities?’ Probably these were the wrong people I talked to, but they were not so well informed. They said, ‘You can do a Schuldschein’ but there was nobody telling me, ‘OK, we have this fund, let’s have a talk.’

Lemardeley, UniCredit: Returning to my earlier point about the difficulty of disintermediation for smaller companies, I would ask Salim and Thierry how low can you go in terms of size?

Hasnat, Muzinich: We look at companies starting at around €5m Ebitda, or slightly lower in some circumstances. We go very low, because this is a space where there are a lot of needs that are not covered.

This is actually the strength of our institution, to be able to dedicate local teams. Because when you look at small and medium companies, you need to do a fundamental analysis of those risks and have local teams able to understand local markets. 

Lemardeley, UniCredit: This is where we’re lagging in Europe — when it comes to small businesses there is pretty much no alternative to banks, primarily because it can cost a lot to be equipped in credit analysis capacity.

At big institutional investors, when you bring an unrated issuer, most of the time the first question you get is ‘what’s the shadow rating?’ meaning ‘we don’t have time to look at it very deeply, so please help us’.

It’s a question of being equipped to look at small corporates.

GlobalCapital: And can you answer that question, what’s the shadow rating?

Lemardeley, UniCredit: Yes, triple-A, that’s how I get the lowest price for my client!


What is investment grade?

de Graaf, Helaba: The Schuldschein market is considered an investment grade market, because at Helaba, when we are arranging a Schuldschein for a company, we’re selecting the issuer carefully. This is because we also invest in most of the Schuldschein issues we arrange and a big share of the investors are also the Sparkassen, the savings banks, and since they are our shareholders, we want to provide them with good credit profiles.

GlobalCapital: And how do you define investment grade? Is it things like debt to Ebitda multiple?

de Graaf, Helaba: Yes, in part. Even if it’s an unrated company we have an internal rating system. It has a correspondence with external ratings. We go down as far as BBB-.

Vallière, Amundi: I think it is investment grade, in terms of pricing and quality of documentation. But the underlying credit is something different.

PD 2019There are two different Schuldschein markets, one that is really small and mid-sized German companies, and the other larger companies. 

You cannot say that the small and mid-sized German companies are investment grade.

Just because of their size, the diversification of their sales, Ebitda, clients. You can call them crossover, if you don’t want to call them sub-investment grade, but they’re not investment grade.

In the other half of the Schuldschein market, there are larger companies and some of them would be investment grade, some of them won’t be.

Bures, RBI: You might be surprised, but I agree. 

In the Schuldschein market we are very cautious about the credit quality we bring to the market. However, I agree that this investment grade story is probably a fiction. Just because of the size of their operations, many Schuldschein isssuers would not get an investment grade rating. 

But that’s perfectly fine, because the Schuldschein market is a market for professionals. We’re not selling to retail clients, we are selling to banks. They might be small or regional banks, but they have to have some internal rating, they have to have some risk management expertise.

We need a funding instrument for these types of clients, and this is what the Schuldschein provides.

What I do think is that their financial ratios should be reasonable. Especially given the covenant-lite nature of many of the deals, the net debt to Ebitda and equity ratios should be decent, because otherwise it’s not justified to do a covenant-lite deal.

Vallière, Amundi: I fully agree with you. I’m not saying that it’s a bad market or that you should not go to it. I’m saying you need to consider that it’s mainly a sub-investment grade market and you will compete against banks.

An asset manager cannot compete against banks, because of their cost of funding. They have access to cheap financing through TLTRO. They can put the asset as a repo to the ECB and get very cheap financing.

Bures, RBI: I think currently the liquidity in the market has reached a point where hardly anyone even uses the opportunity of doing repo business on the Schuldschein with their national banks. Investors use it in their internal calculations, because it’s favourable, but I don’t think anyone really does it.

Hasnat, Muzinich: Products like the Schuldschein, targeting both investment grade and non-investment grade companies, and international large caps, function in a way which the Euro PP cannot really compete with on pure pricing. It’s probably one of the reasons why the Euro PP market hasn’t yet reached the size that was expected.


Asset managers are lending

GlobalCapital: But yet you, Thierry and Salim, have a business. You have €7bn of private debt assets at Amundi and €1.5bn at Muzinich. You’re managing to do private debt investing, in competition with all these other markets?

Vallière, Amundi: Last year we invested €1.3bn across the private debt expertises we’re running and we returned €1.1bn to our investors, from maturing paper, refinancing or whatever. So, yes, we find the material to invest.

The Euro PP has not emerged as what everybody was expecting at the beginning.

But Euro PP is just a name used for marketing purposes. It’s just a bond or loan and you call it sometimes Euro PP, sometimes a club deal, sometimes direct lending.

What is important is that last year, just in France, what was identified as Euro PP was €8bn of issuance, but on top of that were all the transactions done through club deals alongside a bank or other institutional investor, that are not referenced as such, but are still disintermediated financing. 

Disintermediation is much bigger than just this Euro PP marketing label. Otherwise we wouldn’t have been able to invest €1.3bn.

GlobalCapital: What kind of companies are you lending to? Why aren’t they going to banks or the Schuldschein market?

Vallière, Amundi: Some of them are looking for diversification, some for a different maturity, a different amortisation profile. Some want speed of execution, or a specific feature in the documentation. For all of that, they are willing to pay a premium to an institutional investor.

The core for us is companies with between €300m and €500m of sales. Our business model is really to work alongside banks in club deals.

We would never replace the banks. We don’t have a deep network on the ground, like the banks that have local people in every city who can see the treasurer every week. We need to work differently, since we have a different business model. We decided to work closely with banking partners for origination.

Hasnat, Muzinich: Like Amundi, we don’t focus on the product label. If it falls under the category of Euro PP I’m fine with that and it will come into the stats, but our primary focus is to provide capital to issuers. Despite the size of the Euro PP we’ve been able to deploy a lot of capital, as there are several reasons why an issuer will turn to private debt investors.

Sometimes we lend in conjunction with banks — this is a large majority of what we’ve done. Even issuers wanting a unitranche financing will ask for an RCF, so there will be a bank; some hedging — there will be a bank; some leasing — it can be a bank or another entity.

So we really partner most of the time with banks. And we can provide mezzanine financing, on top of a bank solution or not. We can even provide PIK loans, which are more seen as a quasi-equity instrument.

So there are a lot of reasons why issuers come to us, whatever the sizes of the Schuldschein, bank or Euro PP markets.


Do private investors think differently?

Klein, Buzzi Unicem: Is there a market where investors are interested in our credit profile and not so much in our secondary bond curve? That’s the key issue.

If you are basically issuing a bond, but it’s not liquid and you just sell it to one or two investors, who still look at the secondary curve, for us it’s much less attractive. We will still have volatility — as an Italian issuer you just need a bad newspaper headline and your spread is 50bp higher, so it’s extremely difficult to manage the windows of opportunity.

PD 2019But if you have more of a loan profile, where a lender is willing to look at our credit profile, and take a decision that is valid for a period of X months, notwithstanding whatever adverse change can happen, then we have a completely different approach. 

I would like to understand how you deal with this — do you have segmentation, do you do something bond-like and something more loan-like?

Vallière, Amundi: We are interested in the underlying quality of the business we’re investing in, because we are long term investors. So, first of all, we perform a due diligence. Then we try to mitigate the identified risks using appropriate documentation. So, if you are in a capital-intensive industry, we might find some mitigant to encapsulate this risk. 

We are absolutely agnostic in terms of market, geography and format. We can cope with all of them. So if you want to go in the Schuldschein market, we can go with you, but we’ll draft the legal package in a way that satisfies us, and that will be different from the standard Schuldschein docs. 

On the pricing, I need to demonstrate to my client that if they come into a private debt fund I will bring them some added value that they won’t have in the traditional public market. 

It can be diversification, because they will not find the same credits in the public markets. But I will also bring them some extra return.

So if you have an implied rating of BBB-, and we are discussing a 10 year maturity, I will look at what the public market can provide. I will add a certain premium, let’s say, 100bp.

This could be reduced, because you grant me some guarantee or covenants that I don’t find in the public market.

Lemardeley, UniCredit: And this is one of the weaknesses of the Euro PP market.

As an issuer it’s important to have a highly predictable and visible process, something very organised. 

What you’ve described is an ongoing discussion, precisely what a club deal is — you have to negotiate with various parties to reach a position, but you don’t know how long it will take, or what the outcome will be. You can’t create tension with the lenders.

So for an issuer it doesn’t bring any comfort and that’s why we see so many issuers going to other funding sources, because they will find predictability and visibility.

Vallière, Amundi: To have predictability and visibility on pricing you need to have an underwriting backstop from someone. 

Nobody is providing that in the Schuldschein market or the traditional fixed income market. You get a price range.

Lemardeley, UniCredit: No, you have a market, you have reference points, and OK no certainty, but what is the certainty in the Euro PP process, that you will have a trade in the end?

PD 2019Vallière, Amundi: Exactly the same as with fixed income, since the final investors are the same institutional investors.

Lemardeley, UniCredit: I don’t think so. And it can take a long time. It’s a very young product, officially it was created in 2012, so there’s still a long way to go. 

But it’s not very well organised at the moment, there are too many players, too many go-betweens who try to bring opportunities, when they’re not completely sure they are valid opportunities.

That’s a big difference from the Schuldschein market. There, the league table’s pretty much fixed, there are arrangers, which are I think respected by the rest of the market, they know what they’re doing, they know what kind of issuer they can bring to the market. So the way it works is quite solid.

Hasnat, Muzinich: With a little organisation you can get the same security of financing in a Euro PP as you would with banks. For instance, I’ve seen some Euro PP financings where there was a competition between several final investors, to reach the best terms and conditions for the issuer.

Because those processes were very well run, there was time for education on the issuer, for analysis of the documents and for due diligence. And time for really committing and giving certainty to the issuer. With organisation you can achieve those goals.


Relative pricing

GlobalCapital: Something we’ve touched on is the relationship between the pricing at different times in public and private markets. Private debt is claimed to have a calmer attitude to credit — not so volatile. But at the same time almost everybody here has referred to how the Schuldschein market, for example, is connected to public markets. At the beginning of this year when conditions were rough in public markets, so it was in private markets. So are they genuinely a safe haven for borrowers?

de Graaf, Helaba: We see that corporate clients, when they need funding, and the public bond market is closed, shift to other markets. The Schuldschein market is therefore a good alternative.

At the end of last year, conditions in the public market were difficult. Faurecia, for example, in the automotive sector, decided to enter the Schuldschein market and they issued a €700m Schuldschein at really good conditions, with different tenors in euros and dollars. I wouldn’t say it’s a safe haven, but it’s a really good alternative when the bond market is volatile.

GlobalCapital: So, perhaps more reliable, but didn’t those Schuldschein investors charge a higher rate than four months earlier when the market was really good?

de Graaf, Helaba: Investors in the Schuldschein market are focussing on the credit of the issuer. It’s not really comparable with an investor who’s investing in the bond, for example, because there are other metrics to consider.

Bures, RBI: Many of the typical Schuldschein investors cannot invest in bonds, because they don’t have the infrastructure. I have the feeling investors more and more look at Bloomberg and check out the spreads, but not all of them can demand a wider pricing.

They can inform themselves about that, but not all of them can buy bonds, which they would have to mark to market.

That explains the discrepancy in pricing to some extent. It’s a different investor market, they can’t just switch products.

Hasnat, Muzinich: The Schuldschein is one among several financing options. It’s worth keeping in mind that private debt investors have about $307bn of dry powder to invest, which gives issuers some protection. If some other sources of financing dry up, those will still need to be deployed, because we are talking about closed end funds with commitments from limited partners. 

It’s also a protection against pricing volatility, because when you need to deploy such an amount, the economics are more related to the quality of the issuer and specific risks, and less to overall financial industry conditions.

Lemardeley, UniCredit: Yes, the Schuldschein is much more resilient, but that doesn’t mean there is always an arbitrage for issuers. It very much depends on whether you’re rated or not. Structurally, for unrated issuers, at least in France, there is an interest in going to the Schuldschein market. For example, Orpéa is quite a sizeable company which has tried other private and public debt markets, but has decided to exclusively fund itself with Schuldscheine.

For rated issuers, we’ve been in a bull market for the last three or four years and there was no reason to look at the Schuldschein market.

That changed a little at the end of last year, and I’m sure it will change at the end of 2019 or in 2020, as I think the public debt market will be shakier in the coming months.

de Graaf, Helaba: The Schuldschein is also a dynamic market, because, as Edouard mentioned, there are more and more international issuers. Especially since the beginning of this year a lot of French issuers have entered for the first time. There was Peugeot, Faurecia, as well as Iliad, the French telecoms company.

The new LMA Schuldschein documentation, for which Helaba was one of the leading project managers, was introduced last October. It has standardised all the technical definitions, and encouraged issuers and investors to consider this product. 

Also on the distribution side, we introduced last year our digital platform VC Trade, which has had a strong performance since the start.

GlobalCapital: Patrick, you’ve heard some answers to your questions about how pricing operates in these markets, but what is your experience? Do you see all these funding options as a fluctuating parade, where one is more competitive at a different time than another, or is there generally a hierarchy?

Klein, Buzzi Unicem: The last few years were probably not very typical, because bond markets were very bullish and they outperformed, for example, the Schuldschein in pricing for a year or more.

This has changed. Now you have a funding arbitrage if you use Schuldschein. So it depends on timing. 

One of the reasons why we like the Schuldschein or other products, also loan structures, is that it’s more resilient and you have a longer period when you can decide.

We don’t have an EMTN programme where you have flexibility to immediately go to the market. So, even if we do our documentation for a bond issue in 10 days, we could still have 10 days of volatility.

But I would like to ask something about the US PP. We get a lot of proposals from US insurance companies for US private placements in euros.

The pricing gets very competitive — it’s comparable to the Schuldschein market at present. And they will go 10, 15 years. A Schuldschein or bond goes up to 10 years.

But like European investors, these US investors also have to deploy their capital in the best way possible for them. Perhaps there’s more competition in the US, but for them, this seems to work.

Vallière, Amundi: Obviously we’re not a US life insurance company, so it would be difficult for me to answer what is the rationale for them to lend in Europe. 

We’ve done some transactions alongside them and we’re currently doing one in Spain. But most of the time they are able to cope with very large size, in excess of €100m tickets. So it’s not the usual thing we’re doing.

But we’ve seen that with some clients they have made extremely aggressive proposals.

Apparently they’re winning more than 1%, just on the FX effect, which certainly helps them to provide this extremely attractive cost of financing. 

We lost two opportunities recently in France against US lifers and one in Spain, just for pricing reasons.


The future

GlobalCapital: We’ve talked a lot about how the market is — let’s talk about what it could become. Is it at a steady state, or on a trajectory? And will the way it evolves depend on external factors, such as regulation? 

Bures, RBI: We are asking the big questions now! I can mainly talk about the Schuldschein market, where the elevated issuance volume over the last three years is here to stay. PD 2019

The market is very well established now and we can still diversify the issuers.

We are testing the water in central and eastern Europe. Spain and Italy might be hopeful markets. Some issuers from even India and China have tried to issue, and we could perhaps go into the UK, once the Brexit dust has settled. 

And the Schuldschein market is well prepared for an economic downturn, because it is not dependent on a single industry — it’s very diverse. 

And although the Schuldschein is such an ancient product and conservative, we’ve started a lot of activities in platforms and digitalisation. Several scenarios are possible — there might be one or two emerging as the winners, or a totally new player might become the most popular platform. Or the back offices of banks might become more digital and connected to each other by interfaces, we don’t know. 

But I think we’ll see quite a lot of positive developments. As long as the arrangers are prudent in terms of the credit quality they bring to the market — and I think we can say we are prudent on the whole.

There will always be exceptions, but if you think about the volume in the market and the number of defaults, this proves most of the market participants are really reasonable.

GlobalCapital: Frederick, do you think the regulators will start to play a more active role?

de Graaf, Helaba: In the Schuldschein market, the regulators are not trying to change things. The Schuldschein is a loan, so it’s not comparable to a bond, they are two different things. So I don’t think that in the Schuldschein market there will be a big change in the coming years. 

But I agree with Michael that on the geographic development there’s a lot of room, since the Schuldschein is getting more and more international.

Lemardeley, UniCredit: Private debt is a very fashionable product. It covers many asset classes, many ways to execute a transaction, but in the end it is about confidentiality, resilience — all those things we don’t find in public markets. 

I see the whole sector becoming more and more standardised. There’s one private debt product we haven’t discussed, which is all the new initiatives in France from the Banque de France — the new MTN, new CP. Those products are extremely documentation-light, which obviously favours issuers.

More and more we will go for light processes in terms of documentation. We will end up getting rid of the listing, because this is something issuers very much want, and there’s not much value for investors in having a product listed. You’re not so obsessed with the liquidity, but much more with credit quality. 

So there is a bright future for private debt, and we see more and more big corporates looking into it, because it can be efficient in terms of process, it’s less volatile, and it’s getting deeper and deeper. 

I’m still doubtful about direct lending. We see very solid investors in that segment, with real capability in credit analysis. We also see very opportunistic approaches. 

For a borrower, when you go for private debt, it’s also to have long term partnerships with very reliable partners. So I’m not sure all the direct lending players will survive and be as active as they pretend to be at the moment.

Hasnat, Muzinich: I would also say there’s a bright future for private debt, because compared with other sources of financing it’s still growing, it’s still nascent. There’s still attraction.

And we have a pretty limited allocation. The top 50 investors in the world have about 5% of their assets in private debt. That will grow for sure, because there is way more room to take. And because it corresponds to the needs of investors.

What could be changed in future to help the development of the industry? Many things have been done, because the regulators have understood early that they have to avoid systemic groups bringing financing to the economy and then if there is a financial crisis, everything dries up and it’s a global collapse. 

The regulators really understand why they have to help different kinds of private debt and multiply the sources of financing and the actors that will bring liquidity to the economy. What they can do to sustain this trend is to look at very basic elements. The rules can be very different from one investment vehicle to another. 

Sometimes you have tax issues when you invest in one vehicle versus another, or in one geography versus another, within Europe. So national and European rules should be simplified, so that you don’t have local legislation that prevents the development of private debt.

GlobalCapital: Salim, to go back to what Edouard said about direct lending, you’re part of that market — are you worried that there are rash lenders?

Hasnat, Muzinich: Well, if direct lending in future will be no docs, investors that know nothing about our industry coming into vehicles and investing in companies they don’t understand — this is not what we do and probably not what the regulator will allow.

But I don’t think this is happening, because I believe that if private debt is taking some space currently and developing itself, it’s because it brings a valuable solution. What you describe is not valuable. So I guess that at that point there will be someone saying ‘That’s the end of the game and here are the rules.’


Improving communication

GlobalCapital: Patrick, do you think the private debt markets need to evolve more?

Klein, Buzzi Unicem: It was interesting, the private placement in France only came to my knowledge maybe a year ago. A French bank sent me a statistic, and I was like, ‘OK, what is this?’

We had been discussing with various investors in the past, but it was never mentioned. This shows that there is a lack of information for issuers. The banks will sell me the product they know best, which is normal, because they have to play to their strengths.

So I think the key element for an issuer is investor relations. You have to know your investor and the investor has to know you. This is true for all products, public, private, and it will become much more so.

This is the future if we’re talking about environmental, social and governance financing. The use of proceeds will be a key element. To teach your investors about your business, and what are the challenges regarding the environment and other issues, is key.

And I think it should be rewarded. We should see a distinction between companies that are very proactive in talking to investors, and ones that are maybe just once or twice tapping the market, which should pay higher premiums. Because it is very hard for an investor to understand the specific challenges we face every day. You need a lot of information. 

So we are not against the idea that there will be very different products, we need different maturities, structures. But it needs to become more transparent how you can improve your cost of funding.

In the US, they tell me, if you go to the market for the first time, you would pay a higher premium, but less the second and third time, and they can really give you the numbers. I haven’t seen that yet in Europe.

Bures, RBI: Yes, but I think already now it pays off to have good investor relations. I can’t quantify it, admittedly, but companies that actively talk to investors and where the quality of the reporting is good and that are open, this pays off. 

Klein, Buzzi Unicem: I’m not just talking about communication to investors, but the other way. 

There may be some covenants that are necessary for one or other investor. If I know that I want to go long and I want to go, for example, with Amundi, then I should be able to consider this product with certain features that I know upfront, and compare it with other options. But today this is not very transparent.

Vallière, Amundi: What could help to develop these markets — I would agree with Salim, it’s not something easy to implement.

But the US market is homogeneous, which is not the case in Europe. You have different banking systems, tax rules, corporate laws, insolvency processes.

This is complex because you have a lot of relative value issues when it comes to one country compared with another. So if by chance it was harmonised, it would help to develop the whole financing markets. But probably most of us will be retired by then.

And this is still a very young market with a lot of newcomers that have not been through the credit cycle. There are a lot of small lenders with some funny business models. 

But to do it properly it’s really a human resources-intensive business. You need to have a lot of people doing the analysis, discussing with the corporates, engaging with them and getting to know them.

You also need to follow them during the life of the credit. At some point you will need to cope with waivers and amendments. To do so properly, you need a lot of people. So if the credit cycle turns, we might see a consolidation between the various actors.


ESG in private debt

Hasnat, Muzinich: In the future ESG will be a key element. Not only because it’s a fashionable word — it will be necessary for all actors of the economy and financial world to follow that trend, because if you don’t put in place sustainable solutions, there is no future. It’s coming slowly, but more and more in this industry ESG components will be implemented, not only as a general commitment of a firm, but as a way to analyse an investment. It’s also a way to understand the risk. Monitoring those elements translates into better investment decisions.

GlobalCapital: There are now syndicated loans where, for example, a base margin is agreed at 60bp, and the company can get it reduced to 55bp, if they hit certain ESG targets during the life of the loan, or it can go up if they become worse. Could that ever happen in private debt?

Hasnat, Muzinich: It could be a short term incentive, but it’s probably not what will happen in future on the longer term. ESG is really a key component of an investment strategy. It’s not only a reward for issuers doing their job well.

de Graaf, Helaba: Corporates often ask us about this. But we always get the same question from them — ‘I know it’s good, it’s really en vogue, but on the pricing side we don’t see any difference. And there’s more work for us to do — all the reporting and to mandate an external agency who is targeting these criteria.’

It’s rather a question for investors, if they would be ready to have less yield on private debt issues fulfilling ESG criteria.

In the public market, there’s no pricing difference at all, we rather see that on the secondary trading levels, green instruments trade better. But on the private side, for the Schuldschein, there is no difference in the pricing.

However, this is clearly a trend, especially in the French market, where we see a lot of ESG issues, for instance in the public bond market. Helaba is also active in this market with green Schuldscheine we arrange and our aim is also to support this market.

Bures, RBI: Borrowers have become very interested in this, probably because of the news coverage of the ideas being pondered by the EU. They hope to get a better pricing and also think it might fit with their business models and their marketing. 

But right now it has not been entirely thought through. For the Schuldschein market especially, investors are mainly banks. Banks have to have a rating model approved by the financial authorities and I don’t know any supervisory body in the EU yet that would allow banks to factor the ESG component into the rating. 

If you’re allowed to give a better internal rating to a borrower for ESG reasons, then you can give better pricing.

But as long as this is not the case, yes, we can do this slight adjustment that you’ve spoken about, for loans, where if you reach certain targets we can adjust the margin by a few basis points. But for banks as investors, we are not there yet, because unlike institutional investors they don’t have dedicated green funds. 

Klein, Buzzi Unicem: I was here in Paris a couple of months ago, talking to an investor, and they were telling me: ‘We cannot invest in cement right now. There’s a new article in France regarding CO2 footprint and cement is one of the top emitters of CO2, because you have a fuel-consuming kiln process with high temperatures and the calcination process from limestone to cement results in CO2 emissions. Our carbon footprint would be very different if we invested in highly CO2 intensive segments, such as cement. Therefore we have decided with the board not to invest for the time being.’

We see it also in the EU Commission right now with the Taxonomy they’re developing that may lead to a change in investors’ assessments. So this is quite urgent, it’s happening. Banks will be pushed to get there, I’m quite sure of it.

Bures, RBI: I totally agree that it will come. And let’s hope the regulation will not be too bureaucratic and will be very much orientated to real business, because let’s hope what you are telling us will not happen on a broader scale.

Klein, Buzzi Unicem: We are considering right now an ESG financing with investors, arranged by a bank — but not because we want to have a lower coupon. It helps us to quantify. 

We have an ESG strategy, a sustainability report. But if you have a couple of investors asking you, ‘OK you want to reduce your CO2 by 5% in the next two years, how will you do that? What are your investments?’ And then you get the proceeds for this.

This is very helpful for internal purposes, because you can quantify the cost of capital. You can say, we got this money for this investment in reducing CO2 from investors that normally we wouldn’t have been able to access, at a decent price of course, though not necessarily a lower coupon than comparable financing.

This triggers a process internally that speeds up decisions on these investments. So it’s quite useful for corporates to have these pushy investors. 


By Jon Hay
17 Jun 2019