For many years
Schuldscheine have been part of the financing toolkit in Germany.
Issuers have long come to the market from the full spectrum of
sectors, including the Federal Republic, German states (Bundesländer)
and municipalities, banks and corporates. However, it was a period
of difficulty in the conventional bond market during the financial
crisis that prompted a surge in interest in the Schuldschein market
as an alternative funding tool for issuers beyond Germany.
Growth has
accelerated in recent years, with issuance climbing to a record
€20.1bn via 133 different transactions in 2015, according to
Thomson Reuters. Volumes in 2016 are on track to beat that record,
with issuance up 57% to €19.4bn in the first nine months of the
year.
A number of unrated
international issuers have entered the Schuldschein market to raise
around €300m each, an amount that would have been appropriate for
the bond market in the past. Volumes for German corporates have been
even more impressive, with some issuers raising more than €500m.
But ZF Friedrichshafen, the global leader in driveline and chassis
technology, remains unsurpassed following its €2.2bn benchmark
transaction in January 2015.
| What is a Schuldschein? The Schuldschein is a traditional German floating- or fixed-rate debt instrument with a typical maturity of two to 10 years. A form of private placement, Schuldscheine are certificates of indebtedness relating to a loan. They are transferable but are not listed on exchanges, and because there is no legal requirement for a prospectus, issuance costs are low. |
What’s on offer?
There is ample investor liquidity available, so issuers have a wide range of options. There are a variety of reasons why more and more issuers are opting for the Schuldschein instrument instead of other possible financing routes. Issuers want:- To
diversify their range of investors and take advantage of light
documentation requirements. The Schuldschein placement process does
not include the requirement to prepare a prospectus, and
documentation based on German law tends to be slim.
- To
build up a maturity profile. Usually a number of tranches (e.g. 3,
5, 7 and 10 years) are offered to investors at the same time.
Offering a range of maturities in parallel improves the maturity
profile. Instead of having to cope with a high bullet repayment, the
borrower can decide on each maturity date whether to refinance via a
new Schuldschein or repay the tranche from free cash flow.
- A
cost-efficient product. Issuing costs are lower than with other
products, there is no requirement for a prospectus, often the
documentation is prepared in-house by one of the arrangers and there
are no listing or any other associated disclosure obligations to be
observed. This all makes the Schuldschein a viable option for
low-volume issues. Schuldscheine can be as small as €25m to €50m.
- A
margin-efficient product. More than a hundred investors are
approached for each transaction, and investors from various
jurisdictions (across Europe, Asia and the Middle East) compete to
join a transaction and offer best-in-class execution to issuers.
On the investor side, the growth of the Schuldschein market is not just supported by banks and savings banks but also by institutional investors such as insurance companies and asset managers. Ten years ago, German insurance companies were the main non-bank investors in the market. More recently and in parallel with the emergence of the French Euro Private Placement Market, French asset managers and insurance companies have entered the Schuldschein fray. In the last 18 months, investors from the Benelux countries have joined the party.
Since 2015, many issuers outside Germany have used the Schuldschein format – including those from Austria, France, Switzerland, the Netherlands, Finland, the United States, the UK, Sweden, Belgium and Luxembourg. Examples include Austrian furniture retailer Steinhoff Europe, Swiss chemicals company Clariant, and UK aerospace and defence firm Cobham.
While issuance volumes rose 57% in the first nine months of 2016, the number of transactions was little changed (90 compared with 92 in the same period in 2015: it is deal size that has driven growth. The combination of low margins and long tenors offered by investors is prompting companies to borrow larger amounts in order to build up a liquidity cushion or address upcoming maturities at an early stage. Traditionally, the average Schuldschein size was between €100m and €150m, but now there are more and more transactions raising €500m or even over €1bn.
Schuldschein has also gone green: Hamburg-based wind turbine maker Nordex led the way with the first ever green Schuldschein in March 2016, raising €550m. The transaction was quickly followed by a €300m issue by Dutch dairy group FrieslandCampina and a €500m issue by Dutch power transmission company TenneT. Recently, the Spanish company Acciona has closed a green Schuldschein.
Schuldscheine have come a long way from their origins as a purely domestic financing instrument and now offer a format that is widely accepted by companies across Europe.