Commerzbank examines the international attractions of Germany’s private placement solution
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Penelope Smith, Director, ILO, Debt Capital Markets Loans
As borrowers look further afield for alternatives to relationship loans, the private placement (PP) market in Europe continues to attract attention as a competitive alternative.
Efforts to create a pan-European private placement (EURPP) market, with standardised documentation, that might vie with the vast USPP market are continuing although French corporates and investors remain the biggest user of the product. But it’s a far longer-established corner of the market that continues to see some of the most vibrant growth and interest among investors and borrowers and is truly pan-European in terms of investors and issuers.
Schuldscheindarlehen – a private placement based on German law (literally in English ‘certificates of indebtedness’) – has been used to fund Germany’s industrial ‘mittelstand’ heartland for centuries. It came to wider prominence following the global credit crisis when capital market jitters forced big bond players including Siemens and BMW to find other sources of financing.
Since 2013 we have seen a period of continuous growth in the market, with volumes increasing from EUR 8.1bn (77 deals) in 2013 to a record of EUR 20.1bn in 2015 (133 deals)*. The market has remained buoyant in H1 of 2016 with just over EUR14bn raised* which leads to the strong possibility of 2016 being another record year. The Schuldschein accounted for over 60% of issuance in the European private placement market as a whole in 2015. It is also worth noting that not all issues are reported so if anything these figures are probably understated.
One very interesting aspect is the recent continuing expansion in the market from its German roots to international attention. The last few years have seen issuance from corporates in amongst other countries, the UK, France, Belgium, Italy and even as far afield as Brazil.
While the market was founded to finance the industrial and manufacturing sector, today more ‘asset-lite’ issuers in IT, software development and service sectors are turning to Schuldschein to help fund expansion. Over the last year we have increasingly seen the Schuldschein become a “take-out”option for acquisition finance ranking alongside bonds and syndicated loans in Borrowes’ range or choices. In 2016 also we saw German renewable firm Nordex issue the first ever “green” Schuldschein (a deal on which Commerzbank was an Arranger) and more green issues have since followed.
More diverse international issuance has been matched by growing international investor demand. In 2013, Commerzbank closed the largest-ever non-German Schuldschein (and the largest Schuldschein deal for that year) – a EUR535 million transaction for France’s Zodiac Aerospace. Since then we’ve seen Swiss group Lafarge Holcim raise €1bn and Austrian borrower Hofer, (part of the German Aldi Group), raise €1.6bn and while these were both in the traditional German speaking Schuldschein markets, issues of EUR500m+ no longer seem inconceivable for an international market that had previously considered EUR2- 300m as the largest feasible volume. The norm of EUR1- 300m however remains for international issues. The appeal of Schuldschein to issuer and investor are various. There is no need for a market listing or a formal credit rating – making them of particular value to small and mid-sized corporates. They also offer flexibility, allowing multi-tenor and various currency and interest structures. One of the biggest attractions compared to other capital market products is that a floating rate Schuldschein can be prepaid at par.
The appeal of Schuldschein to issuer and investor are various. There is no need for a market listing or a formal credit rating – making them of particular value to small and mid-sized corporates. They also offer flexibility, allowing multi-tenor and various currency and interest structures. One of the biggest attractions compared to other capital market products is that a floating rate Schuldschein can be prepaid at par.
Based on internationally-respected German law and embedded in the existing legal framework of the German civil code, the document for Schuldschein is refreshingly simple and straightforward – often running to just 30 pages rather than the 100+ pages required for a bank loan. Once set up, the same documentation framework can be used for future issuance.
For many issuers, all these features continue to give Schuldschein a march over the nascent EURPP market – and even the well-established USPP market, which whilst offering long term funding, is well known for its often onerous covenants and extensive documentation while the make-whole structure makes exiting a deal early particularly challenging.
For investors, Schuldschein can provide the opportunity to invest in companies where the lack of an existing relationship would otherwise make it impossible. Financial institutions across Europe, Asia and the Middle East that would previously have taken a slice of Europe’s syndicated loan market are now investing in Schuldschein on account of their attractive drawn returns. As they are treated as a loan asset rather than a trading asset Schuldschein don’t need to be marked to market. Institutional investors find the Schuldschein a way to invest in unrated companies that otherwise wouldn’t be possible.
As Schuldschein attract a more global audience, they are showing signs of evolving from their original structure. Investors are seeking documents with financial covenants and default clauses that render them more of a hybrid loan structure. There’s also the question of how diversified the investor base for Schuldschein can become. With borrowers typically having no formal credit rating, the onus is on each investor to do their own credit analysis – which tends to attract an audience that can assess and rate credit internally such as banks and certain institutional investors (such as insurers).
But that said, there is no sign of any shortage of interested investors. With returns that tend to sit between syndicated debt and public bonds, attractive Schuldschein deals continue to see orderbooks two, three or even four times oversubscribed. Upsizing of transactions is common.
But investors remain judicious. Issuers may not be formally rated but a clear and strong credit story is still essential, with most transactions sitting in the BBB+ to BB+ space.
Schuldschein should continue to see support as global economic uncertainty and instability persists. Being a private placement instrument that isn’t marked to market, Schuldschein have been far less affected by short-term volatility than public bond markets. This was shown in 2015 when concerns over Greece’s exit from the Euro, slowdown in China and falling oil prices effectively saw bond markets close to new issuance whereas Schuldschein continued without any negative impact on liquidity or pricing. In 2016 the market has again been unperturbed by renewed concerns over Greece, the onset of Brexit and general global malaise.
But although large players will tap into the market now and then when bond markets prove prohibitive, the real value of Schuldschein will remain in its ability to provide straightforward and flexible funding at attractive pricing levels for mid-sized corporates through most market conditions.
Commerzbank has been involved in initiatives with the Loan Market Association and International Capital Market Association to widen awareness of Schuldschein among potential borrowers and investors. Thanks partly to these efforts, Schuldschein is now included in a universe of ‘Alternative Finance Products’ that also features US and EUR private placement.
As corporate Europe continues to be forced to wean itself off traditional bank debt, the Schuldschein market is set to continue to grow.
*Source: Thomson Reuters