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Schuldscheine take on lower profile but attractions remain

18 Nov 2009

After a year of record-breaking jumbo deals, the Schuldschein market has returned to its original form, providing small amounts of funding to German corporate borrowers. But, as Nina Flitman reports, it is more than just a niche market.

Last year, the Schuldschein market underwent a renaissance. While the product had always been used by the Mittelstand, in 2008 big corporate names such as BMW and Siemens, facing spiking risk premiums in the public bond market, issued jumbo Schuldscheine instead. In April 2008, the carmaker signed a €1.35bn five year transaction in the market, while a month later the engineering firm raised €1.1bn in a four tranche Schuldschein.

However, with the public bond market back up and running at ever tightening levels, these jumbo Schuldscheine were not repeated in 2009.

"This year the market has been totally different to 2008," says Christoph Zender, head of corporate debt origination at LBBW in Stuttgart. "We’ve seen more than double the number of issues, but the deals have been smaller. There’s been a good environment for issuing public bonds, so big, listed companies have tapped that [market]. But smaller companies that don’t want to go to the public markets have still been able to issue Schuldschein."

Although there is still capacity for larger deals in the market — Lufthansa signed a €600m three and five year Schuldschein in March, while SAP issued a €660m deal the month after — the average deal size has remained around €75m-€150m, a sign for some bankers that the market is returning to normal after the exceptional conditions in 2008.

"This year, with the bond markets working again, Schuldscheine have returned to normal," says Stefan Olendorf, co-head of loan sales in Germany and head of Schuldschein at Commerzbank. "While multinationals and large borrowers have found that they can get quicker and cheaper funding by issuing bonds, for smaller, high quality names or for corporates making their debut in the capital markets, the Schuldschein market is the place to issue."

The stability of the Schuldschein market, as well as the certainty of price and volumes it offers, means that even in a year of financial volatility corporates have been able to tap the market having never done so before. For example, Bohringer Ingelheim made its debut in the Schuldschein market, issuing a €300m deal in June. The unrated pharmaceutical group was able to obtain a longer tenor than is typical in the market, issuing the deal in five, seven and 10 year tranches.

A German business

While Schuldscheine funding is available to issuers that have never tapped the capital markets before, and even to unrated borrowers, the market is mostly limited to German corporates.

While there are exceptions to this, such as French firm Michelin, which launched a €100m five year deal at the beginning of the year, many investors cannot invest outside Germany and all documentation is in German.

"This is still very much a German-based business," says Zander. "Around 60% of investors come out of Germany (although there is also some quite strong demand out of Austria and Swizerland), and while there have been some international borrowers, the bulk of supply is still coming out of Germany."

While the Schuldschein market is mostly tapped for general corporate funding, occasionally strong borrowers are able make the market part of their acquisition plans. German business software company Software AG tapped the market for €150m in August to take out part of a €340m acquisition facility.

However, Shculdscheine are not to be regarded as a staple product for acquisition deals and only a few, top-rated corporates can use the product for event-driven financing.

But the product is still a valuable source of funding for German corporates. "Schuldscheine are still a nice tool for borrowers," says Olendorf. "Although we’ve moved away from the big names doing mega-deals, mid-cap borrowers are still finding it is a good way to build a banking group. If the company’s story is right, then this market offers a great opportunity to raise €100m-€150m and to attract the interest of banks beyond their core relationships."

Indeed, although the large deals of €1bn are a thing of the past, interest in Schuldscheine has not diminished and the total volume of issuance for the year is expected to match the €20bn raised in 2008.

"Although the volumes are not much compared to the Eurobond market, it is more than a just a niche market," says LBBW’s Zender. "Schuldschein is a very modern form of funding. As it gets harder for companies to get funding from banks, it makes sense for them to look at different investors, different forms of financing. This is the first step for a company looking for another source of liquidity."

18 Nov 2009