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Saturday, 18 November 2017

IFR Schuldscheine Roundtable: Part 2

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  • Schuldscheine Roundtable 2014 Action shot 3

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IFR: What’s the view on that, generally, around the table? Is the French private placement market competing with Schuldschein? Is there room for both markets?

Michael Schramm, BNP Paribas: Well, it’s a different product. I mean, the European private placement that we’ve seen is clearly a market entry point for the French mid cap, but it’s a bond listed off a memorandum or prospectus-like product, and it has a fixed coupon only and bullet maturity. That clearly is appealing for some, but not all. With French issuers, we have seen a growing acceptance of Schuldschein despite the fact that it’s under German law but the French have overcome that.

The beauty is that you can do the tranching of Schuldschein in various coupons and various maturities, and that in the end for a mid cap company that is trying to diversify its funding or tap the capital markets for the first time is very, very appealing. The documentation is slim, and it’s a very straightforward process. Clearly, there are examples of other companies that have led the way, and of course that gives the French a little bit of competition amongst themselves.

Ingo Nolden, HSBC: Europe is on its way to building a private placement market structure, maybe we’re  going to end up with a market structure comparable to the US private placement market or maybe we will find a European way. Currently there is competition between the German/Austrian market and other segments, starting off with Schuldschein, and the French private placement. We know that UK insurance companies are looking to different ways to create something like a private placement market. It’s a competition for the best structure and we might find a European way that mixes existing products. So maybe in three to five years we can say, “We can take a bit of French private placement and a bit of Schuldschein”. Both have respective advantages and disadvantages.

For us, a Schuldschein market is true private placement market. It should remain like this and documentation should not be posted publicly. This is different in the French private placement market, as they have bond prospectus standards. A number of clients are aware of these issues, so the Schuldschein market offers advantages here. On the other hand, there are a number of high-quality institutional investors active in the French private placement market that are not banks. The product has to fit the purpose, that is where we are at the moment. Cash-rich investors are open to new ideas, they are listening and considering new ways to invest, it’s up to us to come up with good ideas and good content and to connect issuers with investors.

Michael Schramm, BNP Paribas: Maybe that makes the French even a little bit more flexible than most of the other legislations. The issuers do look at all the different formats, and for us as the arrangers, or potential arrangers, it is up to us to get the best tailor-made solution for their refinancing needs. It could be the unrated bond, which has been mentioned before; it could be the Euro private placement in France; it could be Schuldschein; or it could be the US private placement. Each of these products has different advantages and disadvantages, but in some cases the advantages outweigh; the US private placement market by the way doesn’t do crossover deals, so that could be a disadvantage as the product is not really there for a certain issuer and credit quality. But it might be then Schuldschein, which is more privately done and you have a more granular order book, and in some cases it’s Euro private placement which is literally a club deal with one or two investors. So the beauty of it is, and that probably is the European idea, you have different markets with different characteristics and you pick the one that serves you best.

The beauty of Schuldschein of course – and this is what many issuers like – that it is so flexible…so we must be careful with standardisation

- Klaus Aldinger

Klaus Aldinger, LBBW: For the last year, I’d say the advantage of Schuldschein was that many investors in the Schuldschein universe have low funding costs in core Europe, whereas the periphery is facing higher funding costs. Therefore I’d say, last year, Schuldschein was probably the most attractive investing instrument or issuing instrument for a corporate issuer; as long as they are well-known name in the German-speaking area.

IFR: Are all of these products, the various forms of private placement, are co-existing quite happily, or are they competing, fundamentally? What’s the view? What’s your view?

Karl-Heinz Bühner, LBBW: My feeling is that they don’t compete, really, because normally a French company does a French private placement. If a French company issues in Germany, it’s targeting German investors specifically. Maybe a German company would like to tap into the French market and so it makes a French private placement. To be honest, at the end, the price and maturity is most relevant for the company or issuer.

Raoul Heßling, Commerzbank: I disagree; there is a big competition among these different products – unrated bonds, Schuldschein, private placement, US private placement – because companies have funding needs, and so it is really about what product best suits the requirements of this company. If you take a BBB company, in a normal industry, they have lots of routes available and then it’s then really about what suits them best. Is it 10-year funding at minimal spreads, but with 150 pages documentations and three financial covenants? Or is it the short-form Schuldschein, where you document everything in 20 pages and you get a mix of five- seven- and 10-years at attractive spreads as well?

But there is a real competition amongst these products. For lots of companies, pricing will be very important. There are two products that can win this. On the US private placement side, it’s the long tenors because in Europe you’re still struggling to get €100m or €200m in 10 years for an unrated company. If companies however want to go for tight spreads with good documentation, Schuldschein is winning currently because all the other domestic private placements are quite expensive at the moment.

IFR: So, Schuldschein is pretty competitive on price?

Raoul Heßling, Commerzbank: On the five, seven, and 10 years, yes. On the medium tenors.

Richard Waddington, Commerzbank: It also it depends on geography. Schuldschein is so well embedded in the German market, it’s a natural product for a number of the unrated companies. That skirmishing between the products is happening more – you’re seeing it in France, you’re seeing it in the UK, and then you’re seeing it also in Scandinavia. So it really depends. There’s different battles going on in different jurisdictions overall and each battle has its pros and cons. Over time, I don’t know, I’m undecided whether we’re going to have one product or whether effectively we’re still going to end up with these individual fiefdoms, with skirmishing going on in the different jurisdictions.

Kirsten Schulz-Lobeck, Erste Group: I would agree with what you said, Richard, but I also agree with what Ingo said in a way, because in Austria you have Schuldschein competing with retail bonds which were there before because of the tax reasons so  it’s a totally different dynamic. But then I see some potential for the private placement side although I don’t feel it really competes with Schuldschein because it has a longer tenor and is much more targeted to certain investors. I can also see some competition, I’m with you on that one.

We are trying to find our way and it’s very specific to every market in its own dynamic. I was thinking about this, because you asked me initially “How do you feel this year’s going to be?” and I said, “Well, the issue is supply”. Then I thought that if we try to be a bit more positive, it’s also very exciting”, because it’s the creation or the first stages of a private placement market in Europe, and that is good. Yes, the bond market is growing, and I’m not sure the loan it knows what it’s doing these days. In that sense, it’s quite positive, because we can be bespoke on one side, which is always good because you can fine-tune and I guess it’s better for us to compete against one another; on the other hand, you can go bigger, like you can do on Schuldschein or some of the retail bonds.

IFR: It’s certainly an interesting time, as the markets perhaps move together or the rationale for a European private placement market becomes a little bit more obvious. Are there any specific moves to try and unify or to try and draw the markets together at the moment? Has anybody got a view on that?

Raoul Heßling, Commerzbank: I don’t know whether ‘unification’ is the right word, but there is.

IFR: How would it happen, if it were to happen?

Raoul Heßling, Commerzbank: Just as an example, the Loan Market Association published Schuldschein guidelines recently. This is one of the reasons that more and more international investors are becoming more interested in the product and trying to find first insight into its mechanics and how it worked. This is the loan solution, there are discussions going on regarding doing something similar for a more bond-style product. It will be a problem to unify everything, but it would be nice to have one solution which is more loan-like, for investors that are okay with private placement, and one European solution towards a bond-style, probably listed solution. That is how I imagine a unified private placement would look like.

My view is there is already a European private placement market, it’s just segmented…and it’s going to grow

 - Richard Waddington

Ingo Nolden, HSBC: But there are certainly limits to some quality unification or standardisation. The big strength of the Schuldschein market is clearly the bespoke way of structuring transactions, in terms of tenors or documentation requirements.

That is the major reason why the Schuldschein market took off after the Eurobond market was set up. Before that the Deutsche mark corporate bond market, offered small sizes such as 60 million Deutsche marks or so. After the inception of the euro, we saw companies struggling to find smaller issues than €150m-€200m in 2000/2001,which seem to be minimum issue sizes in Eurobond markets. This gap could be filled by the Schuldschein. So it will be interesting to see how far we can standardise and what issuers will accept, because we need to be cautious about that. We need to ask - what’s an issuer focusing on? Is he focusing on price? Is he focusing on confidentiality, or the structural issues? Arrangers need to be cautious to not to standardise too much, because ‘mimicking’ a bond market would not be the solution for a bespoke private placement market.

Klaus Aldinger, LBBW: We already have quite good standards and if you look at documentation, they are all quite similar. The issuers in the Schuldschein market are really a broad range. You have very good quality credits that like to issue and you have the crossover credits that also would like to issue. If you put that all into one standard, that might be difficult and the beauty of Schuldschein of course – and this is what many issuers like – that it is so flexible at the moment, and that you can really put in individual clauses without stepping away from some kind of standard. So therefore I’d say we must be careful with standardisation.

IFR: What would be in it for borrowers if the markets were to standardise or come together? What would be the advantage for borrowers? Who would be driving the creation of a bigger private placement market?

Klaus Aldinger, LBBW: Just to answer your question: this is exactly the point. At the moment it’s a seller’s market. Order books are really going through the roof, which gives issuers more leverage and therefore it may be not the right time for standardisation. If the tide turns someday, investors become rare and it’s difficult again to place a Schuldschein – or more difficult – and you have a  need to go international or find more institutional investors, then of course standardisation might be the answer.

Rudolf Bayer, UniCredit: From an issuer’s perspective, it’s always good to have options on the table. The Schuldschein has a different investor base to a bond. Each situation has its advantages. The Schuldschein market was nearly always open, even when the bond markets were closed. Convergence in documentation is welcome, although each case will have different requirements.

IFR: Is there anybody that thinks that the creation of a European private placement market might not necessarily be a good thing, and the market should keep discreet? There has been quite a lot of comment about the creation of the European private placement market lately.

Richard Waddington, Commerzbank: My view is there is already a European private placement market, it’s just segmented. Fundamentally, the products we’re talking about are akin to private placement, each one has its own characteristics. It’s just not a homogenised market as such and is clearly in the development phase. The demand is growing on the unrated side, so that’s where the interesting developments are going to be. Traditionally, institutional investors struggle on an unrated basis, but they’re getting over that now. The issuers have got more optionality now, traditionally options would have been limited. They could access the loan market but there wasn’t a lot else available for them in the capital markets, and now we’re seeing more choice for them. So it’s there, it’s developing, and it’s going to grow.

Raoul Heßling, Commerzbank: From a borrower’s perspective, having one big European private placement market would be advantageous because they could lay out in one documentation what they want and then go out to all the investors that we have in Europe. Then they could try to get French or Scandinavian insurance companies, or Austrian retail investors or whoever is willing to provide the best combination of price and tenor. We are not there yet, because at the moment the client has to decide what kind of product he wants at a very early stage, and then he can only target one of these investor groups. Because one investor wants French law; the other one Austrian; the other one Scandinavian. This is, from a borrower’s perspective, inefficient and what should be resolved at one point in time. It is a very long-term goal, though.

IFR: It would make it easier to execute for borrowers, perhaps.

Richard Waddington, Commerzbank: Yes, and in one go, companies would have access to the whole investor universe. There are lots of investors out there but each has their own individual requirements.

IFR: I see you nodding Rachel. Are you agreeing?

Rachel Rueiying Yang, Chang Hwa Commercial Bank: Yes I agree. From an Asian investor’s point of view, some harmonisation might help. As a (Taiwanese) commercial bank we focus on syndicated loans and Schuldschein loans from the London office. We haven’t ventured into any of the private placement, more bond-like products and I very much doubt that we would, as a traditional commercial bank. I’m in constant dialogue with other Taiwanese investors based in London who are all pretty similar, although I can’t speak for them.  Harmonisation would help if we want to broaden our investment base. It’s easier for us to convince our credit committees why a French company is issuing something under German law because for our ultimate board decision-makers, they have to understand why. I mean, in case of a default, will this product be upheld in the French court? Under German law? So it’s hard to convince them sometimes. We eventually managed to, but it did take us more than a year, we swap notes with other Asian banks, say, Singaporean banks or a couple of Chinese banks; sometimes we swap notes with them. I think they will have some hesitance, but it’s an issuer’s market at the moment.

The Schuldschein market is an unrated market, when we go down the credit curve, we are testing the limits of investment grade

- Raoul Heßling

Richard Waddington, Commerzbank: Can I ask why you decided to invest in Schuldschein?

Rachel Rueiying Yang, Chang Hwa Commercial Bank: It was really the drop in the syndicated loans market in 2010. That’s really when we started looking at Schuldschein in late 2010. At the time, no other Taiwanese banks were looking at it, but now almost all the major Taiwanese banks with a European base are looking at the product. We probably represent only a slight piece of the big investor pie but we came, a long way from an investor’s point of view to understand the product. It  opens up a great opportunity for us to look at what’s traditionally outside of our reach. Apart from the German Mittelstand, we also look at French companies, and there’s also one UK issuer which we managed to take part in. There was also one Russian issuer a couple of years ago which we joined and some Scandinavian names. So that’s quite exciting for us,because from a syndicated loans perspective we would never be able to get in a deal with a small ticket size.

IFR: What have you been most interested in buying recently? Is it primarily Schuldschein – you said you were looking at some – is it all of those different nationalities tapping the Schuldschein market that you’re interested in, or are you looking beyond some of the other similar products across Europe that exist at the moment?

Rachel Rueiying Yang, Chang Hwa Commercial Bank: We’re probably not diversifying away from the Schuldschein market unless we can convince the decision makers in Taiwan that we could maybe buy into the private placement market, but then it’s a less transparent product, so I don’t think we would do that. But in terms of issuance, yes, we would probably like to look at more Scandinavian names even though the yield is probably not easy. In terms of balance, we try to maintain some balance between the syndicated loans, which is our core mandate, and Schuldschein. The Schuldschein is really just to make up for what we’re missing in the syndicated loans market. I wouldn’t say that’s the main product that we’re investing in, but it’s a sizeable portion of the total investment portfolio. At least as far as I’m aware, a couple of the Taiwanese banks are putting a bit of a brake on Schuldschein investment, because head office is concerned that is it is becoming a private placement or Schuldschein investment institution because this is something that they are still grappling to understand, even though we have been investing.

To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3 - Feature

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