With bank liquidity scarce for some borrowers, and investors on the hunt for alternative assets, Schuldscheine are proving to be a global hit.
To view the digital version of this report, please click here.
The hunt for alternative sources of yield has turned the Schuldscheindarlehen (SSD) into one of the hottest areas in the credit market.
In particular, corporate SSD volumes rocketed in 2012, as issuance more than doubled from 44 deals worth €6.4bn in 2011 to 115 worth €13.8bn, according to Thomson Reuters LPC data.
“2012 was the breakthrough year for the growth of the SSD market outside Germany as investors looked for as investors looked for alternatives to loan products which were in short supply,” said Richard Waddington, managing director in Commerzbank’s DCM loans group.
Companies from UK retailer J Sainsbury to German carmaker Porsche tapped the market, while German utility and transportation company HGV Hamburger raised a total of €926m from two deals. More borrowers are embracing the format with debut deals this year from French seed supplier Vilmorin which placed a €130m Schuldschein with European and Asian investors in March.
The market for SSD loans is benefiting from the macro trends affecting the loan markets globally. As banks cut balance sheets and preserve capital for their biggest and most lucrative clients, smaller and unrated European companies are looking increasingly to private placement markets for financing and find that SSDs provide a flexible format with relatively simple documentation in comparison with the US PP and 144A markets.
Meanwhile, bankers are seeing growing supply from Southern European borrowers, particularly Spain and Greece, where banks have been reluctant to increase loan exposure.
At the same time, investors are hungry for alternative assets in the credit universe.
The spotlight fell on the SSD market in 2008 because it was one of the few funding markets to remain open – it has continued to gain momentum from investors seeking diversification and access to mid-cap companies in which they cannot invest through the bond markets.
Evidence of how far the SSD market has come was in September last year when French mail specialist Neopost raised €67m in a four-year Schuldschein facility that was the first deal of its type to be syndicated solely in Taiwan.
The Neopost financing, which was arranged by Deutsche Bank met both the company’s need for diversification and that of investors, who would not normally get access to the company’s syndicated loan market, where lending is carved up by a company’s relationship banks.
Neopost used the SSD market alongside other PP markets, a bond issue and loans from French insurance companies to meet its financing needs. “Corporate borrowers are viewing Schuldschein as an additional product that completes a variety of funding tools,” said Johannes Maerklin, global head of private placements at Deutsche Bank. “This is a product that fits perfectly for borrowers who have a specific funding need in specific tenors.”
SSDs can be issued as floating or fixed debt instruments with maturities of two to 10 years in typical volume of €10m–€500m, although deal sizes are increasing.
“The SSD product is very flexible in terms of tenor (three, five, seven or 10 years), currency and fixed/floating issues. The deepest liquidity is in the three, five, seven-year segment, but the 10-year segment is developing because institutions are increasingly looking to invest in unrated companies that they cannot access via the bond market,” said Waddington.
For many unrated borrowers, tapping the US private placement market in the US or printing a 144A/Reg S deal triggers the need to issue a prospectus, and that means the company will have to apply IFRS accounting. The Schuldschein documentation is straightforward, spanning around 20 pages compared with 10 times that for a bond prospectus, and there is no need for extensive marketing.
The Schuldschein investor base has evolved to support the growing supply as investor groups with different needs have emerged. International investors and foreign banks are entering the SSD market because they see it as an opportunity to forge relationships with Western European corporations and credits. Another big attraction for the buyside is they do not have to mark vanilla SSD to market. The drop in supply in the traditional loan market volumes has pushed investors towards Schuldschein.
The growth in corporate issuance particularly outside Germany, is providing the biggest source of deals and excitement for many bankers, who predict that corporate supply could grow again in 2013. Schuldscheine are providing real impetus for the growth of a pan-European private placement market to rival the US. Market participants are now seeing European pension funds and insurance companies investing in long-dated Schuldschein tranches as they seek to match liabilities over 20 to 30-year periods.
“The growth of this market is down to educating the investor base. There is no limit to how big it could get”
But long-standing Schuldschein bankers say the focus on the exciting growth of the international corporate sector neglects to take in the broader size of the market. As well as corporate issuers, SSA, covered and senior unsecured format accounted for roughly €80bn of issuance in 2012, which according to Maerklin, made it ”the biggest private placement market in the world”.
They are emerging alongside the traditional investor base comprising Germany’s Sparkassen and Landesbanken, which buy the bulk of the domestic Mittelstand deals, favouring the sweet spot, which is between three and seven years. Meanwhile, money market investors are buying Schuldscheine with a duration of between three months and two years.
While the SSD market is light on documentation, the marketing programme associated with an issue, usually around four weeks, means execution is still slower in terms of issuance than an EMTN programme. In some cases, investors in say the US PP market prefer the extra protection that more detailed documentation allows.
Pricing in the Schuldschein market will continue to compress in line with the broader suite of credit products. “Corporate SSDs are typically issued for unrated companies in the BBB+ to BB+ rating segment. In terms of pricing, corporate SSD carry a premium compared with a comparable loan which usually benefit from relationship pricing and the expectation of cross-sell,” said Waddington.
Some bankers predict supply will cool following a sharp rise in issuance last year, but investors and borrowers continue to be driven by the need for diversification, while market participants point out that for all the talk of the “great rotation” into equities, cash continues to pour into credit.
“The growth of this market is down to educating the investor base. There is no limit to how big it could get,” said Maerklin.