SSA borrowers complaining of expensive bank lending (such as French regions) as well as those on a quest for the widest possible investor base (everyone else) will find a useful alternative capital raising tool with the Schuldschein and Namensschuldverschreibung formats.
Schuldscheine are bilateral loans, privately placed and generally governed by German law. Similarly, the Namensschuldverschreibung format is a registered bond governed by German law. Like MTNs, they allow for smaller sized and structured payouts customised to an investor’s desires.
Investors like them because unlike regular bonds, they do not have to mark the securities to market — they can be treated as loans or held-to-maturity assets on investors' balance sheets.
There have been periods of interest in this market before from SSA borrowers, particularly at the height of the financial crisis when bond markets shut down. But now it is not just new issuers that are taking an interest.
Given what many see as the end of the enduring bull market for bonds now upon us, it is perhaps no surprise that the investor base for these two formats has begun to widen beyond Germany's borders.
The traditional and still active German investor base for these products has been expanded to foreign pension funds and asset managers over the last year or so.
More investors can only mean one thing for SSA borrowers — lower funding costs. This is especially useful given the longer maturities that the products tend to be issued in.
Bulgaria is one issuer who plans to use Schuldscheine to finance its budget shortfall. The borrower will use the format for the first time in the coming weeks to raise up to €360m.
Meanwhile, Corporación Andina de Fomento, IFC and SEK are using Schuldschein and Namensschuldverschreibung formats to extend their maturity portfolio and expand their investor base.
Most SSAs already have MTN programmes for programmatic, bespoke issuance and and issuing in Schuldschein or Namensschuldverschreibung will incur extra documentation costs. But the market offers a unique opportunity for borrowers to diversify their investor base and obtain ever cheaper term funding. If SSA borrowers have learnt anything from the crisis years, it is that these opportunities cannot be ignored.