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Of course, the global financial crisis kick-started the market’s current growth phase: Schuldschein was one of the very few markets to remain open as bond and loan markets around the world seized up in the eye of the post-Lehman storm. But the latest growth spurt of 2011-2012 proved that this isn’t just a market that faddishly opens and closes due to whatever frame of mind issuers or investors happen to be in.
The segments of the market that have rightly received most attention have been the dramatic growth of the corporate issuer segment – the principal focus of the IFR Roundtable – and the expansion of the investor base for this most traditional of German loan-style financing formats.
From its beginnings as a private funding channel for German municipal and public-sector type issuers, what’s fascinating about the market is that it can offer such incredible flexibility
to issuers right across the SSA, FIG (unsecured and covered bonds), multinational and midcap corporate spectrum; as well as flexibility to a wide range of buyside accounts.
Buyers include the traditional and still very active German investor base of Sparkassen and Volksbanken; to banks throughout the world – North America, Latin America, China, rest of Asia, Russia and all over Europe were all mentioned in the discussion as being avid buyers of Schuldscheine – to institutional real-money accounts that are increasingly patronising the market.
As one participant mentioned in the discussion around internationalisation, European issuers can now tap Schuldscheine to raise US dollars in Asia. That’s pretty incredible. And the market can now accommodate issuance from benchmark size of €500m-plus for top-end corporates and banks right down to the much smaller size required by German Mittelstand issuers, which are turning to the market in droves owing to the cycle of disintermediation that it still ongoing and because they can get good execution.
Primary issuance has tended towards multi-tranche, where traditional buyers tend to anchor the shorter tranches and real-money the long end, and one of the signs of the globalisation of the market is that issuance now comes routinely in multiple currencies – in 2012 issues were printed entirely in US dollars – as well as fixed or floating-rate format.
For German SMEs, Schuldscheine are invariably the first step towards full capital markets access but as unlisted private placements, sellers can operate under the radar screen and remain out of the glare of publicity. Liquidity, however, is thin on the ground as the market retains one of its essential characteristics as a haven for buy-and-hold investors.
The attraction for bank investors is the ability in many cases to gain debut exposure to corporates they want to build out relationships with. Price is always important in capital markets, but as much as price, it’s also a portfolio diversification play that doesn’t necessarily always demand an exit price. For all buyers, the non mark-to-market nature of Schuldschein makes the instrument a good hedge against volatility.
As for 2013 expectations, roundtable participants weren’t expecting any dramatic pick-up in volumes – not surprising given the dramatic 2011-to-2012 growth – but there was a unanimous view that the coming year would see more debut issuers tapping the market and the tendency would probably be slightly back towards the smaller end of the market as German Mittelstand issuers come to the fore.