Perhaps predictably, the Schuldschein market has taken a while to limber up to a green new world.
At the back end of 2016, Nordex, TenneT and then FrieslandCampina (totalling €1.35bn) sold green Schuldscheine in quick succession, which prompted a wave of acclamation that green deals would be the future of the market.
But a years have passed with little more than a drip of green deals, and no-one really knows why the concept didn’t take off.
“I think investors weren’t keen, or particularly interested, and banks stopped pushing it to borrowers,” said one arranger in Frankfurt.
The green Schuldscheine in its infancy was a basic formulation — plucking the process from the green bond market, where use of proceeds was often classified in as broad a term as "for green purposes". There would be an external review from companies like Sustainalytics or Viego Eiris, and borrowers would effectively be left to their own devices.
But ultimately, it was seen as an afterthought.
“The first few years of the green Schuldschein movement were borrower driven — namely if a borrower wanted green debt it would just slap a green tag on it and then carry out a normal Schuldschein,” said another arranger in the market. “There wasn’t much incentive beyond PR and it cost a bit more money to get accreditation so not many borrowers did it.”
However, this year there has been a notable shift in mentality. The first transaction (Porr) of the year was at least in part green, and there has been a good flow ever since.
“Investors are talking about it,” said the first arranger. “This is the key shift this year — they have started to become interested, and better informed on the concept.”
The greatest example of this is Porsche, which last week placed a €1bn Schuldschein via BayernLB, ING and LBBW, to fund things including the research and production of electric vehicles.
This was by far the largest green Schuldschein (the former front runner was the first green Schuldschein, €550m from Nordex) and according to people familiar with the deal, the order book was much greater than the final deal size.
“A huge number of investors in their due diligence on the Porsche transaction will have learned more about the green concept,” said the second arranger. “This is only good for further issuance.”
According to some sources in the market, there have been a growing number of green portfolios entering the Schuldschein market too, which could push pricing down for green transactions.
ESG price ratchet
Indeed, one green issue this year already had a nod to pricing benefit in its structure.
Mechanical and plant engineering firm Dürr raised €200m over five, six, eight and 10 year maturities via ING and LBBW. The spread on the debt is linked to Dürr’s sustainability rating by third party agency EcoVadis.
Dürr scores a 51 on EcoVadis’ scale out of 100, putting it in the top 30% of companies EcoVadis reviews. Margins will tighten 2bp if Dürr scores under 40 on EcoVadis’ scale, and widen 2bp if the firm scores over 62.
This structure has proved very popular with companies in the loan market — almost every week now in Europe, another company converts either a revolving credit facility or a term loan to this form, and the technique has spread to Asia and the US. But it has never been tested in the bond market.
“This was a highly significant moment in the Schuldschein market, and gives us an edge over the public bond markets,” said one investor in Frankfurt. “If borrowers can find more attractive margins through improving their sustainability metrics, this will give them further incentive to go green and go to the Schuldschein market [over bonds]."
A functioning green section of the Schuldschein market — with investors primed for issuance and the option of sustainability linked notes — will be much more impactful for deal flow than the market straying too far overseas looking for new issuers.
A green Schuldschein from the right issuer has demonstrated widespread appeal in a way that no non-European transaction has. With a sophisticated green lender base the market will be more attractive to European borrowers choosing between different markets when it comes to raising debt.
This can only be a good, green thing.