IFR Schuldscheine Roundtable: Part 1
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IFR: Welcome to IFR’s outlook for the Schuldschein market in 2014. This is very much a discussion for you, and I’m looking to you to shape the flow. Well, it’s nearly spring and we’re well into the new year, so a good place to start might be thinking about what might be ahead for the rest of this year. What are you thinking about, or looking at? What do you see as the key issues ahead?
Kirsten Schulz-Lobeck, Erste Group: The biggest issue is supply, at least from our point of view. We all agree that there is a lot of demand, but the challenge is to fill the demand. If I talk about the Austrian market, what we have noticed is that the big corporates are all pretty much financed, at least for this year. So the question is, how much can you go down the curve? How small can the companies be that you bring to market? That’s going to be the biggest challenge, at least talking about the Austrian market, at the moment.
IFR: Richard, going down the curve. Do you have a view on that?
Richard Waddington, Commerzbank: Unfortunately it is inevitable. There is a general lack of supply, it’s clearly not just an issue for the Schuldschein market, it’s an issue in the loan market, and we’re also seeing this in the bond market as well. It’s a question of how much companies want to issue right now. A lot of them are well financed. They’ve been deleveraging, they’re sitting on quite a lot of cash, even though it’s relatively cheap to issue. The question is, do they want to issue? The question that they’re posing is: “If we have a requirement, we’ll come and speak to you”. The mainstay of the Schuldschein market, the credit quality of issuers that we want to see do not want to issue as much. Consequently, it means that we’re going to be moving down the curve in terms of credit quality issuance.
The biggest issue is supply…big corporates are all pretty much financed…So the question is, how much can you go down the curve?
- Kirsten Schulz-Lobeck, Erste Group
IFR: What does that mean from a practical perspective? Are we talking about unrated companies? Are we looking at more unrated issuance?
Michael Schramm, BNP Paribas: Well, on this classic syndicated Schuldschein, which is aimed at the German bank investor base, more than 90% of the issuers are non-rated, and the investors are very happy to do that on due diligence, as they have to. The question is just really, how much further down can you go in terms of credit quality? We are already quite comfortable in terms of credit quality for crossover names. The question is, can you really get away with high yield? Will investors still go for that credit quality in order to achieve a certain yield or in order to fill that demand?
IFR: What’s the feeling on that?
Michael Schramm, BNP Paribas: I would not say that we will definitely see lots of high yield-trades. There are some names that are good enough and have a great brand recognition that will get away with it, but I would be reluctant to say that investors will have huge demand for high-yield.
IFR: How would we characterise last year? What were the key developments around the product?
Karl-Heinz Bühner, LBBW: We saw smaller issuance than previous years. We will see second-tier companies issuing this year, because the large companies which are able to issue in the bond market, will do this because the conditions are more friendly to them than in the Schuldschein market. So we’ll also see more unrated bond issues in this year, instead of Schuldschein. Especially bigger companies whose revenue is about €5bn or more.
Klaus Aldinger, LBBW: One trend that we’ve seen was longer tenors. In the last years, five years was considered to be a long tenor, and seven years was probably the longest possible. Now you see the five-year as the shortest possible tenor and the seven-year becomes more normal. Good quality issuers tend to go 10 years or even longer, and sometimes have to, because the yield on this type of transaction is rather small. So to make those Schuldschein interesting for investors, borrowers opt for the longer maturities.
IFR: Okay. So, maturities are definitely pushing out, seven years is normal, and 10 years is…?
Klaus Aldinger, LBBW: If the credit quality is good, at the moment, seven year tenors are more sought after than five years.
Richard Waddington, Commerzbank: Historically you saw that band of three to seven-year maturities. The three-year has gone, but you’re still seeing five, seven and 10-year tenors. From an optimisation perspective as well, the demand is strong on these assets that you’re able to push people into the longer tenors overall, which historically you might not have been able to do. The books on these deals are so strong now, you have the ability to shape and sculpt the tenor into a longer perspective.
IFR: I should imagine that’s very attractive for borrowers; they’re getting increasingly favourable tenors and probably terms on other fronts, as well?
Raoul Heßling: If we look at trends, maturity was one topic, we were also able to close quite a lot of order books early, especially after the summer; which is something we haven’t seen in recent years. On nearly every transaction that came in August, September, last year, we had to tell investors, “If you don’t put an order in, in the first one or two weeks, don’t try because your allocation will be zero”. That was how the market was in the second half of last year, and how it has re-opened this year.
Rudolf Bayer, UniCredit: In line with longer maturities, we saw more demand from institutional investors who clearly prefer longer maturities, seven, 10, or even beyond that.
IFR: I was about to ask who’s buying. Are there any distinct, clear bases of investors, or has there been any change on that front?
Rudolf Bayer, UniCredit: Yes, institutional investor interest is increasing; there is international demand for issuers from Germany and Austria, but also it is also evolving beyond that.
Kirsten Schulz-Lobeck, Erste Group: Wouldn’t you say it also depends on the issuer? Certain issuers draw the institutional appetite, but then for some other issuers it’s mainly the old ‘banks’?
Ingo Nolden, HSBC: On the institutional side, we expect a broader universe of issuers, going forward, because a number of institutional investors are trying to break out of their usual, ‘blue chip schemata’. Several trends are moving in the right direction, we’re seeing more institutional investors coming to the market in a broader scope. There’s currently a rather unstructured ‘grab and handle’ procedure in dealing with unrated credit, how to process this in a more structured way will be a tricky topic for 2014.
IFR: How does the institutional investor base break down? Is it pension funds, insurance companies, other credit funds?
Ingo Nolden, HSBC: What we see is mainly insurance companies and pension funds to a lesser extent. Funds tend to prefer listed credits. In addition to what Klaus and Michael just mentioned about ‘going down the credit curve’ and going up the tenor, we expect to see this trend going forward. But I mirror what Kirstin said: it’s all a question of supply. Demand for this supply definitely exists.
Klaus Aldinger, LBBW: At the moment, the challenge for syndicates is not placing Schuldschein, but to ensure that each investor gets at least some of the credit and sometimes that means it’s necessary to close the books very early, after one or two weeks. Also with this yield, or appetite for maturities of more than 10 years, you have another product, the namensschuldverschreibungen (NSV), which is also a registered format in favour of the issuer. We also saw last year that borrowers tended to issue NSV with longer maturities. But it’s certainly not a product for bank investors but for institutional investors.
IFR: Kirstin, I just want to come back on something that you said about, “It depends which companies, as to who’s interested in buying”. Can you put some colour around that? Who’s buying what? What appeals to whom?
Kirsten Schulz-Lobeck, Erste Group: I’ll focus, naturally, more on the Austrian market. If there is a public angle somewhere in an issuer, then we have seen the institutional investor base is very strong. But if you go to the larger mid caps in Austria, that investor base pretty much falls away. I know you might have one or two that sign up to a deal, but that’s pretty much it. For the mid caps, especially when they are not that well known, the banks are still the key investor base.
For us, a Schuldschein market is true private placement market. It should remain like this and documentation should not be posted publicly
- Ingo Nolden
IFR: Are there any sector preferences?
Karl-Heinz Bühner, LBBW: Well, normally, institutional investors go for asset-based companies with long assets. Infrastructure companies with strong permanent cashflows are institutional investors’ favourite targets.
Michael Schramm, BNP Paribas: But as long as you hit a certain credit quality – I would say BBB+ or better – you have the opportunity to approach institutional investors. I’d say pension funds as well as insurance companies are interested in that. So is there a certain sector preference? Yes, I would agree on the infrastructure and the public background, but I would add credit quality. As long as you can offer something above the standard that brings you to a single A – or close to a single A rating, that would allow you to go for a ten year-plus maturity.
Richard Waddington, Commerzbank: You have a bit of a split here; the institutional investors are grappling with how to process the credit – they are used to buying traditionally rated credits; they’re now looking and saying, “Let’s look more at the unrated space”. So they’re figuring out how to process these credits. They will provide longer maturities, but it will usually be only down to a certain point of the credit curve, so they will want to stay in fairly solid BBB-land.
But you are also finding the other bedrock of Schuldschein investors - the banks - won’t go as far on the tenor but they will start to look more down the rating curve. They will still stick to that three-five-seven area that serves them.
But you’ll see them move down to the sub-investment grade space, banks have the ability to analyse these credits. I don’t think the insurance companies and institutional guys will go down the curve as far as banks will.
Raoul Heßling, Commerzbank: You asked, “Which investors are looking at the product?” You have to differentiate, each order book looks different when you look at each client, and there are different drivers to that. For example, let’s compare German and international issuers. On the German side we have smaller issuers tapping the market at very aggressive terms, because we have a lot of banking competition in Germany with a lot of saving banks and Landesbanks so margins are pretty thin. Here we see 80% of the order books are often placed in Germany and roughly 20% internationally.
If we look at international issuers, they have to get an international syndicate because they don’t have this domestic demand. So the spread might be a bit more juicy than here in Germany, and they will sell roughly two thirds placed outside borrowers’ home country. Again, each order book is a bit different and spreads are better on the international side – it is easier to get institutional investors onside here than in Germany.
IFR: How was the international mix last year, and what’s it looking like this year?
Raoul Heßling, Commerzbank: For the market this year, it’s still very early to say. If we compare last year with the previous year, with the contraction in market volumes, especially order books in Germany got a bit more domestic because some international investors were struggling to join five year transactions that pay 100 basis points. So that’s one thing, it is more domestic, with more savings banks.
We’ve seen a further broadening on the international side, more banks are being added from each country. Instead of having five investors from one country, we now have six or seven looking at the product on the banking side.
We’ve already talked about institutional investors looking more at the product. Most change is in France, with regulation loosening up and I’m very curious to see the competition between the French private placement and Schuldschein going on this year. It will be a topic.