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IFR’s second Schuldscheine Roundtable, held in Frankfurt on March 11, attracted the market’s top originators who were keen to talk about the product’s role in Europe’s nascent private placement market and where we are likely to see activity emerge in the coming year.
Schuldscheine 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 its enduring popularity since the market has stabilised suggests that the product has a carved out an enduring role.
The Schuldscheine was a beneficiary of the eurozone crisis as investors passed lower funding costs on to borrowers with tight spreads and good documentation. In 2013, the market was one of the most attractive investing instruments for corporate issuers with a profile in Germany.
From its beginnings as a private funding channel for German municipal and public-sector type issuers, the market now offers flexibility to issuers right across SSA, FIG (unsecured and covered bonds), multinational and midcap corporates.
2014 is expected to be an exciting year for corporate Schuldscheine – the principal focus of the IFR Roundtable – which is now primarily a market entry product for mid-cap companies, unrated companies, and for family companies seeking to diversify their funding.
The key issue this year, as in the broader syndicated loan market, is supply. Companies are well-financed and sitting on cash piles with little need to issue new debt, which is allowing even smaller companies to achieve very competitive terms in a borrowers’ market.
This is forcing innovation. Arranging banks are having to move down the credit curve – possibility even into high-yield territory – in a previously investment-grade market as investor demand for unrated companies grows.
Tenors are also stretching. Three year maturities are a thing of the past and typical maturities of five, seven and ten years are increasingly attractive to institutional investors.
Insurance companies and pension funds have joined the traditionally active German investor base of Sparkassen and Volksbanken and are showing strong appetite for corporate Schuldscheine.
The investor base for this most traditional of German loan-style financing formats continues to expand, with strong appetite for BBB+ listed companies – preferably asset-based infrastructure firms and longer tenors.
While the Schuldscheine market was a little less international in 2013, with a focus on smaller German companies achieving competitive terms, international issuers were still able to attract global buyers with roughly two-thirds of deals placed in international syndicates.
The product offers an excellent way for international retail loan investors struggling to access smaller-ticket lending opportunities in the syndicated loan market to invest, as the loan market moves towards big-ticket relationship lending.
In a bid to further broaden the investor base, the Loan Market Association has brought out a template to help new issuers to help cut costs. Law firm Simmons & Simmons is also producing a guide to the Schuldscheine market in Mandarin.
But its really the creation of a European private placement market that is preoccupying bankers, as German and Austrian Schuldscheine increasingly competes with the French private placement and a nascent UK market as well as retail bonds.
Opinion is divided whether one market will be created or whether skirmishing and infighting between the markets will continue. Some bankers counsel against standardisation that could get rid of Schuldscheine’s bespoke advantages, while others believe that a private loan solution for investors interested in private placement and a listed bond solution could be on the cards.