PRIVATE DEBT MARKETS USPPs, Schuldscheine, Euro PPs, Unitranche, Direct Lending, Unrated Bonds, MTNs, Regulation April 2018 - Helaba
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THE VOICE OF THE MARKETS
PRIVATE DEBT MARKETS
USPPs, Schuldscheine, Euro PPs, Unitranche, Direct Lending, Unrated Bonds, MTNs, Regulation
April 2018
Sponsored by:
000 Private placements cover.indd 1 25/04/2018 10:00
PRIVATE DEBT MARKETS
Euromoney Institutional Investor PLC
8 Bouverie Street, London, EC4Y 8AX, UK
Tel: +44 20 7779 8888 • Fax: +44 20 7779 7329
Email: firstname.lastname@globalcapital.com
Printed by The Magazine Printing Company
Managing director, GlobalCapital group: John Orchard
Director: Ruth Beddows
Managing editor: Toby Fildes
Editor: Ralph Sinclair
Contributing editors: Nick Jacob, Philip Moore
PEOPLE & MARKETS
People and markets editor: Owen Sanderson
People and markets reporter: Nell Mackenzie
PUBLIC SECTOR and MTNs
SSA and MTN editor: Craig McGlashan
2 OVERVIEW SSA reporter: Lewis McLellan
Private debt: bumps are coming but the road will stay open FINANCIAL INSTITUTIONS
Bank finance editor: Tyler Davies
Covered bond editor: Bill Thornhill
5 SCHULDSCHEIN: OVERVIEW Bank finance reporter: Jasper Cox
Schuldschein tries to keep old virtues but embrace the future SECURITIZATION
Global securitization editor: Max Adams
US securitization reporter: Sasha Padbidri
8 SCHULDSCHEIN: INVESTORS Senior European securitization reporter: Asad Ali
Schuldschein: no country for old men CORPORATE FINANCING
Corporate finance and sustainability editor: Jon Hay
Corporate bond editor: Nigel Owen
10 SCHULDSCHEIN: ISSUERS Leveraged finance associate editor: David Bell
IG loans reporter: Michael Turner
Can the Schuldschein stay on top when rate climate changes? High yield bonds reporter: Victor Jimenez
Equities editor: Sam Kerr
Equities reporter: Aidan Gregory
12 SCHULDSCHEIN: US ISSUERS Private debt reporter: Silas Brown
A new German export: the Schuldschein’s American dream DERIVATIVES
Derivatives editor: Ross Lancaster
Senior derivatives reporter: Costas Mourselas
13 FRANKFURT PRIVATE DEBT ROUNDTABLE
EMERGING MARKETS
Keeping the Schuldschein’s feet on the ground Emerging markets editor: Francesca Young
Emerging markets deputy editor: Virginia Furness
21
Latin America reporter: Oliver West
US PRIVATE PLACEMENTS
Design and production manager: Gerald Hayes
US private placements stake out their future Production: Sam Medway, Ant Parselle, Andy Bunyan
Night editor: Julian Marshall
23 INTERNATIONAL US PRIVATE PLACEMENTS
Sub-editors: Simon Busch, Richard Cosgrove, David Jones
Cartoonist: Olly Copplestone
• smokingbiplane@hotmail.com
US PP foreign policy working despite Schuldschein’s land grab
Head of sponsored reports: Annabel Nason
25 LONDON PRIVATE DEBT ROUNDTABLE Head of operations: Sara Posnasky +44 20 7779 7301
Commercial director of events: Daniel Elton +44 20 7779 7305
Room for all in European private debt Publisher: Oliver Hawkins +44 20 7779 7304
Deputy publisher: James Andrews +44 20 7779 8074
34 EURO PRIVATE PLACEMENTS
Euro PP awaits end of QE but pan-European hopes fade Marketing
Laura Spencer +44 20 7779 7384
Claudia Reyes Marquez +44 20 7827 6428
36 PARIS PRIVATE DEBT ROUNDTABLE Josh Pearson +44 20 7779 7388
Customer Services: +44 20 7779 8610
Investors keep discipline, wait for narrow space to broaden
Subscriptions
James Anderson +44 20 7779 8338
45 DIRECT LENDING Katherine Clack +44 20 7779 8612
Mark Goodes +44 20 7779 8605
Direct lending – a bite out of banks’ business Philip Huntsman +44 20 7779 8036
George Williams +44 20 7779 8274
47 INFRASTRUCTURE FINANCE Directors: John Botts (Chairman), Andrew Rashbass (CEO)
Colin Jones, David Pritchard, Sir Patrick Sergeant,
Private debt’s attractions grow for infrastructure finance Andrew Ballingal, Tristan Hillgarth, Imogen Joss, Tim Collier,
Kevin Beatty
49 UNRATED BONDS All rights reserved. No part of this publication may be
Looming volatility set to test unrated bonds’ popularity
reproduced without the prior consent of the publisher.
While every care is taken in the preparation of this
newspaper, no responsibility can be accepted for any errors,
51 MEDIUM TERM NOTES however caused.
Low rates to end, but fresh challenges await MTNs © Euromoney Institutional Investor PLC, 2018 ISSN 2055 2865
Private Debt Markets | April 2018 | 1
001 Contents Private Placements 2018.indd 1 25/04/2018 10:03
OVERVIEW
Private debt: bumps are coming
but the road will stay open
The thriving modern private debt market has germinated and grown in a greenhouse — the
post-crisis shrivelling of banks and central bank stimulus of debt markets. But already, the banks
are coming back. Next, central bank support will disappear — and sooner or later there will be a
recession. Will private debt markets cope? Jon Hay reports.
PRIVATE DEBT is a growth market. The money is accumulating fast: being very cookie-cutter. Anything
The asset class has been expanding private debt funds raised $107bn in north of 3.5 times leveraged, or out-
ever since the financial crisis, and 2017, and more than a third of all the side their geographical target area,
participants expect that to continue. capital has not yet been invested. or wanting flexibility around docu-
In the past decade, it has enjoyed But private debt is not one market: ments, they were not interested. So
a near-perfect set of following winds: it is many. Preqin tracks five types: you could be thoughtful and have a
banks contracting; companies seek- direct lending, mezzanine, distressed competitive advantage.”
ing new sources of funding; and low debt, special situations and ven- M&G Investments, which had been
interest rates driving investors to seek ture debt. But these do not include the first European investor to join the
yield, while making it as easy as pos- swathes of other lending. The US US PP market in 1997, expanded into
sible for borrowers to repay. private placement market and Ger- direct lending at the same point.
All good things come to an end. many’s Schuldschein, traditional-
The US Federal Reserve is tightening ly investment grade markets, both
monetary policy, while the Europe- scored record issuance in 2017, of “I don’t think money
an Central Bank is gradually easing $75bn and €27bn. is going to disappear.
its foot off the accelerator. All big “This is not a homogeneous mar- The demand
economies are expanding at once, ket,” says Richard Waddington, will remain but
but the bull run in equities is nine head of loan sales and private debt there will be a
years old and benign periods rarely at Commerzbank in London. “There repricing of risk”
last longer than that. The US stock- are different elements of the private
market has fallen 9% since its Janu- debt ecosystem. The Schuldschein Richard
ary peak. and US PP are skirmishing in invest- Waddington,
The question for specialists in pri- ment grade territory. The Schuld- Commerzbank
vate debt is: what will happen to schein dips into crossover, then at
their brave, big new market when the double-B the Euro PP is active and
financial cycle turns? in the single-B space you’ve got uni- But, fortunately for the European
“The big test will be, when rates are tranche and direct lending.” economy, banks — at different speeds
going up, is the market stable?” says in different countries and asset class-
Jürgen Michels, chief economist at Fresh pastures es — have been recovering their appe-
BayernLB in Munich. “If it holds, it Beyond those, European insurance tite for credit.
will be a very popular tool in future as companies and asset managers are Straightforward corporate loans,
well. The acid test is: does this whole exploring many other new niches in especially investment grade ones,
structure hold, and we don’t get a search of attractive assets. were the first asset they took back.
huge amount of defaults?” “The world has always divided into That meant the swelling direct lend-
The D-word is much used in pri- what banks will do and what they ing market became what William
vate debt circles at the moment, won’t,” says Andrew McCullagh, head Nicoll, co-head of alternative credit at
because of Carillion, the UK construc- of origination at Hayfin Capital Man- M&G in London, calls “very much a
tion group that went into liquidation agement, one of the early movers into high yield market, with no particular
in January, and Steinhoff, the South the direct lending market that sprang norms of documentation”.
African retail empire fighting to stay up after the crisis in 2009. Direct lending now typically refers
solvent after its share price collapsed When banks are eager to do a par- to deals of €20m-€300m at leverage
in December amid accounting irregu- ticular kind of lending, their capi- of three to five times Ebitda, to com-
larities. tal structures and economies of scale panies with Ebitda of €15m to €60m.
But so far, the market shows no sign often mean they can beat institution- Specialist funds have raised so
of slowing down. Preqin, the research al lenders. But the combination of much money that the competition
group, counts $638bn of private debt Basel II, the crisis and then Basel III has become intense. Banks are fight-
assets under management globally in meant banks pulled back from many ing to get into deals, too, especially in
June 2017, up from $205bn in Decem- kinds of financing they had dominat- Germany, the Benelux and France.
ber 2007. The asset class is now nearly ed before 2008. McCullagh dates to around 2013 the
a quarter as large as private equity, When it came to smaller and more time when “most banks across Europe
having been only a seventh as large leveraged corporate loans, says began to stop worrying about whether
on the eve of the crisis. McCullagh, in 2009 “banks were they had enough regulatory capital to
2 | April 2018 | Private Debt Markets
002,04 Overview 2.indd 2 25/04/2018 08:43
OVERVIEW
survive and more about book can be built there.
making money”. Investors want more private debt Rudolf Bayer, head of
M&G and Hayfin are provate placements at
still interested in vanilla In 2018 Longer term UniCredit in Munich,
direct lending, but both Investors’ Invest less Invest Cut Raise says: “In the bond mar-
have cast their nets wider. allocation plans capital more allocation allocation ket we have seen a lot
“I never want to be in (% of investors) of technological devel-
a fashionable market, Private equity 8 37 4 53 opment, especially on
because that’s an awful Private debt 10 42 2 54 the administrative side,
thing,” says Nicoll. M&G Real estate 16 26 11 32 which has had a posi-
has cut back on seeking Source: Preqin tive impact on speed and
new money to invest in before. Specialists in these markets costs for banks and issu-
direct lending and instead is originat- are quite calm about the prospect of ers. It would be a positive devel-
ing deals in less crowded areas, such the next downturn. “We try to do eve- opment if the Schuldschein also
as leasing and trade receivables fac- rything to make sure we have high became faster at handling deals for
toring, usually partnering with inde- quality issuers, with the same qual- issuers and investors.”
pendent finance companies. Nicoll ity as in the past,” says Jörg Senger,
says banks can no longer be bothered global head of sales and origination at Down is not out
to spend months structuring complex BayernLB in Munich. For issuers and investors in the more
deals, opening a space for the skilled “So we are focusing on midsize leveraged parts of private debt —
and patient investor. and big companies. When SMEs try including direct lending, which has
Hayfin has diversified into ship- to tap the market we have to do due never been through a credit down-
ping loans, non-performing consum- diligence. My feeling is the clients we cycle — the next recession, when it
er debt, niche real estate portfolios, reject usually don’t come to the mar- comes, is bound to cause casualties.
some tranches of securitizations and ket with another bank.” Direct lending borrowers are usu-
financing companies’ inventory. It Because of their confidence about ally smaller than classical leveraged
even has a strategy focused on the the credit cycle, the US PP and loan issuers, which tends to make
healthcare industry. Schuldschein markets are more workouts harder. Direct lenders will
focused on the processes that could often have to negotiate workouts on
Change is coming make them more efficient and enable their own, and may have to bail com-
When the interest rate and economic them to attract even more deals. panies out with more cash.
cycles turn, these many kinds of pri- In the US PP market, recalibrated Direct lending and other kinds of
vate debt are not all going to perform risk charges from insurance regulator private debt will take some knocks,
in the same way. The first challenge the NAIC could improve the incen- but they are likely to survive — just as
will be the withdrawal of ECB stimu- tives for lending to companies of high yield bonds have now weathered
lus, expected by the end of this year, slightly lower credit quality. two recessions in Europe.
and likely to affect all credit markets. Meanwhile, a clutch of second tier Four things have changed in the
“It will change to a buyer’s market,” investors are starting to ape the big- debt landscape since 2008 — all fun-
says Thomas Leicher, head of capital gest buyers by learning to engage in damental reasons for private debt
markets at Helaba in Frankfurt. “Cred- currency swaps, meaning that even to exist, which are unlikely to be
it spreads will widen and issuers may though they only manage dollars, removed by the next crisis.
be more reluctant to borrow money.” they can lend to European companies Savings allocated to credit contin-
Could investors that began explor- in euros or sterling. ue to rise. Meanwhile, liquidity has
ing private debt when yield drained The Schuldschein market is wres- declined in public markets, so the
from public bonds turn away again? tling with how to bring itself up to sacrifice made by investors switching
“No one is quite sure how institu- date, without losing its old-fashioned to illiquid credit is less. The sophis-
tional demand is going to play out,” virtues: very light, flexible documen- tication and knowledge of corporate
says Waddington. “I don’t think tation, a large number of small inves- treasurers has greatly increased. “We
money is going to disappear. Clear- tors and careful gate-keeping of credit have just done a marketing roadshow
ly some will, but the products are quality by the arranging banks. to Asia where we spoke to potential
embedded — people like them. It’s “The number of companies that issuers,” says Senger. “I was really sur-
likely that as one of the biggest buy- will use the Schuldschein will prised how deep the knowledge was
ers is removed, there’ll be a normali- increase, because they are moving already and how eager they were to
sation of credit spreads and rates. The from bilateral credit to the capital tap the market.”
demand will remain but there will be markets,” says Leicher. “What you Finally, the stricter regulation and
a repricing of risk.” need to accommodate this is plat- more conservative balance sheets for
The pain is likely to come later, forms, digitalisation of the process, banks are not going away, so there is
when the economy slows and higher so that you can reduce the cost and likely to be room for institutions to
rates become hard for weaker firms therefore place Schuldscheine for lend for a long time to come.
to bear. smaller sizes, like €20m.” “In the long term,” says McCullagh,
Parts of the market, notably the US Helaba has launched a new plat- “this is an asset class that will deliver
PP and Schuldschein, have borrow- form, open to all dealers, investors good premium, low volatility, sensi-
ers of mostly high credit quality and and issuers, so that all documents can ble cash yield to investors and is here
have been through many recessions be shared and signed online, and the to stay.” s
4 | April 2018 | Private Debt Markets
002,04 Overview 2.indd 4 25/04/2018 08:43
d-und-s
Tailor-made financial solutions.
Made in Bavaria.
BayernLB
With total assets of EUR 215 billion, BayernLB is a leading commercial bank for both
large corporate and Mittelstand customers in Germany and Europe, which also boasts
a strong retail arm. In terms of total assets and credit volume, it is one of Germany’s
top banks. Owners are the Free State of Bavaria and the Bavarian savings banks, which
hold stakes of 75% and 25% respectively. The Bank is an integral part of the Sparkassen-
Finanzgruppe in Bavaria.
Your Schuldschein – Our Expertise
As a capable partner in capital market financing, we have gained a high level of
expertise over the years and now occupy top positions in the market. BayernLB has
been a leading international arranger of Schuldschein note loans right from the start.
Also when it comes to sustainability / green Schuldscheine, we know how to use our
knowledge and experience: With four transactions in the last two years – among them
the first green Schuldscheine ever to be issued – we already have an excellent track record.
For further information please contact
Paul Kuhn, Head of DCM Origination Corporates
Phone: +49 89 2171-25756, paul.kuhn@bayernlb.de
BayernLB, Brienner Strasse 18, 80333 Muenchen
u www.bayernlb.com
bl_Anz_GlobalCapital_210x297+3mm.indd 1 13.04.18 14:38
SCHULDSCHEIN: OVERVIEW
Schuldschein tries to keep old
virtues but embrace the future
The Schuldschein market has broken into unknown territory, welcoming borrowers and lenders
from far-flung lands, while establishing itself as a hotbed for technological advancement. Can the
miracle last? Silas Brown reports.
THE SCHULDSCHEIN is shedding But the lender base has been recep- “There are many
its old skin. Once an austere and tive to new ideas, and arrangers are efficiencies to work
staid German market, it has shown energised by this. on in Schuldschein,
a remarkable ability to adapt to bor- “Blockchain technology will which could drive
rowers’ needs. It has grabbed the change the role of banks as interme- down costs for
attention of European corporate diaries in the economic process. We arrangers, issuers
finance and racked up over €27bn of don’t want to merely observe this and investors and
issuance in 2017, from 150 borrow- development; we want to proactive- open up the market
ers. ly shape this field,” said Joachim much further”
Participants believe the enticing Erdle, head of corporate finance at
mix of tight margins, lean documen- LBBW, in a statement. Paul Kuhn,
tation and tenor variety the Schuld- Telefonica Deutschland followed BayernLB
schein can offer has worldwide in January, launching a €200m
appeal. Schuldschein, which included a are largely beyond what blockchain
Technology can help the instru- €50m one year tranche using block- technology can undercut. There are
ment clean up inefficiencies of chain technology, also led by LBBW. legal costs and bank fees for issu-
process, which will help it expand “I compare the situation around ers, and for investors and arrangers
to issuers across Europe, Asia and blockchain with the internet when it there is a lot of time spent negotiat-
North America. started,” says Albert Graf, Telefonica ing pricing over phones and emails.
Deutschland’s director of corporate This is where proper efficiency gains
Seeking tech breakthroughs finance. can be made, and there are other
Almost all see technology as one of “It [blockchain] will disrupt this schemes attempting to provide
the keys to the growth of the Schuld- world — and instead of reading answers to those.
schein market, but some believe it is about it, or thinking about it, we’re
the paramount factor. acting on it.” Putting everyone together
“There are many efficiencies to Blockchain might cut costs for dis- Helaba and VC Trade launched
work on in the Schuldschein market, tribution, but there are more promi- a digital platform for Schuldschein
which could drive down costs for nent inefficiencies that a distribut- issuance in mid-March, designed to
arrangers, issuers and investors and ed ledger could not solve. So some cut costs for arrangers, issuers and
open up the market much further,” question whether introducing block- investors alike, while making the
says Paul Kuhn, head of debt capital chain goes far enough. market more transparent.
markets origination at BayernLB in “LBBW’s attempt was a pioneering “This software will oversee the
Munich. effort, but it was very much the first whole process between issuers and
In June last year the market step,” says one arranger from a rival investors, and will make the Schuld-
hosted its first Schuldschein using bank. “There is still a long way to schein market much more efficient
blockchain technology, issued by go — and actually, the real cost and and transparent,” says Andreas
Daimler for €100m via Landesbank time is in the process of the Schuld- Petrie, head of primary markets at
Baden-Württemberg. Origination, schein, not in merely the distribu- Helaba in Frankfurt.
distribution, allocation and execu- tion.” The software is open to all Schuld-
tion were conducted electronically Although the marketing period for schein participants. It is meant to
through software provided by Tar- a Schuldschein is lengthy, between carry a Schuldschein transaction
gens and TSS, LBBW and Daimler’s four and six weeks typically, there is from negotiation through pricing
IT systems. some sense to this. As three quarters and allocation all the way to settle-
The deal was sold to German sav- of the borrowers entering the mar- ment.
ings banks Kreissparkasse Essling- ket are unrated, serious credit work This could reduce the labour and
en-Nürtingen, Kreissparkasse Lud- is required to determine whether the cost of issuance for participants by
wigsburg and Kreissparkasse Ostalb. issuer is a worthwhile investment. up to 40%, says one banker involved
This was a surprise to some, who felt So the market could not function in the launch, and perhaps provide
this sort of bank might be too tradi- effectively if it did not give investors some compensation for arrangers’
tional to be receptive to technologi- adequate time. falling fees.
cal developments in the instrument. Costs in the Schuldschein market This in turn could make the mar-
Private Debt Markets | April 2018 | 5
005-06 Schuldschein overview 2.indd 5 25/04/2018 08:43
SCHULDSCHEIN: OVERVIEW
ket more accessible to smaller issu-
ers, which either cannot afford the The Schuldschein’sSSD
growing internationalism
fees, or struggle to find an arranger issuance by country in euros
willing to put in the effort to bring 3
€bn 2015 2016 2017
them to market.
2.5
“No one wants to bring smaller
issues of €10m-€20m to the mar- 2
ket, as there’s not enough money in
1.5
it,” says one Schuldschein banker in
Frankfurt. “But if the software could 1
dramatically cut the costs of issu-
ance, and arranging that issuance, 0.5
the market could open for smaller 0
issuers.”
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Helaba is in close contact with
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issuers and investors, which are set
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to begin using the platform short- Source: Helaba
ly. “I had a quick look in my inbox
[an hour after the launch] and there interest. Commerzbank, HSBC and invest in Nordic borrowers.
is already substantial interest from LBBW offered investors tenors of “Nordic issuers are the next step
institutional investors looking for five, seven and 10 years, at fixed and after Benelux and the German-
access,” says Stefan Fromme, co- floating rates, and Asian commercial speaking region, and it seems that
founder of VC Trade. banks’ European offices pushed the the wide range of investors in the
Of course, the platform becomes transaction to €958m. But the real market are interested,” says one
more interesting the more wide- growth lies in Asian lenders without investor at a German savings bank,
spread its use, but the participants such worldwide presences. although adding that some lenders
seem highly confident of its suc- “What we are trying to do is not are still watching from the sidelines.
cess. “We expect the system might just sell to Asian offices in Paris or Huhtamäki, the Finnish food
have 80%-90% of the market using London, but selling in different non- packaging maker, offered five and
it by the end of 2019,” says one European jurisdictions across the seven year tranches in April last
banker involved in the platform. He world,” says Petrie. year, in either euros or dollars, and
believes progress towards a compre- “This raises different questions a 10 year euro tranche. It closed the
hensive software is useful for every around tax and legal documentation transaction with €117m and $35m
market participant, and particular- that have not been fully explored raised. Asian and European com-
ly if the Schuldschein market has yet. That could be the next big mercial banks, as well as some
ambitions to grow across the world. growth for the market.” smaller regional German lenders,
If these investors are found to bought the loans.
Asian blueprints be good candidates to buy Schuld- “Once there are a few more flag-
Advances in technology could ease scheine, this could be the next long ship transactions you can expect
the understanding of the product in term milestone for the instrument, more and more investors to become
Asia, which is where the more ambi- and draw it that much further from interested,” says the investor.
tious Schuldschein arrangers are its German roots. “Sometimes German investors need
looking for new opportunities. In the meantime, however, the to see a few transactions succeed
“Is it possible to truly take the German arranging banks are looking before they have true confidence in
instrument to Shanghai, or Tokyo?” north for growth. a developing region.”
asks Helaba’s Andreas Petrie. This is beginning to happen.
“We are in the process of exam- Can you see the Northern lights? Konecranes followed Huhtamäki’s
ining taking the product across Nordic issuers are ahead in this deal in November.
Asia. We had roadshows in China, respect. The region is proving fertile It hired Commerzbank, Deutsche
Japan and Taiwan for Lufthansa ground to find new borrowers for Bank and Helaba to arrange the
and Trelleborg and over 50 insur- the Schuldschein market, as origina- facility, which was split into four
ance companies and regional banks tors notice that local bank lenders and seven year fixed and floating
came.” are not providing tight margins to rate notes.
The interest in that region was local borrowers, and Schuldschein Swedish agricultural group Lant-
sparked by the influx over the last investors are becoming more inter- männen launched at €100m dual
few years of Asian commercial ested in diversifying their portfolios currency Schuldschein in early
banks entering the market to diver- to that region. March, and Finnish packaging firm
sify and increase their lending in “There is room for arbitrage in the Wihuri debuted with a €75m trans-
Europe. Nordics, and we can compete with action.
Forklift truck maker Kion Group the local banks on price,” says Kuhn. As the investor predicts: “Once
sold nearly €1bn of Schuldschein But the test will be whether you see one or two Northern
notes at the beginning of 2017, ben- arrangers can entice the broadest lights, more and more will begin to
efitting from that increasing Asian range of Schuldschein lenders to appear.” s
6 | April 2018 | Private Debt Markets
005-06 Schuldschein overview 2.indd 6 25/04/2018 08:43
SCHULDSCHEIN: INVESTORS
Schuldschein: no
country for old men
The Schuldschein market attracts a diverse mix of investors, with different tastes and needs. Amid
the push and pull of a burgeoning market, the burning question is whether each of these differing
characters will remain content — or whether some may get pushed out, as the market develops and
changes shape. Silas Brown reports.
SOME SCHULDSCHEIN investors But new types of investors are with comparable tenors to the
still remember the good old days, arriving, including European and institutional investors, at seven,
when only German borrowers from Asian commercial banks, more eight or even nine years.
the industrial heartlands would used to the cut and thrust of capital “The maturity advantage that an
find a way to their desks. It was a markets. They are multiplying in institutional lender had has gone,”
local market for local companies, number and appetite to the extent says Thomas Schneider, head of
supported exclusively by local that they rival the Sparkassen European corporate loans at Allianz
investors. for market dominance. They are Global Investors in Munich.
But that is changing — fast. Last bringing with them customs not Bank lenders are also prepared to
year, for example, borrowers from seen in the Schuldschein market cede ground on covenants.
as far afield as the US and Russia before. Deals can be oversubscribed “I sympathise with institutional
flocked to the market. “Last year was in a matter of days, as investors investors that would like financial
place soft orders before analysing covenants if they lend for longer
a borrower’s credit quality, to tenors,” says Richard Waddington,
be sure of a stake in the final head of loan sales and private debt
“The maturity placement. at Commerzbank in London. “The
advantage that an Process machinery firm Andritz institutional lenders must offer
institutional investor launched a €200m Schuldschein something that other investors
had has gone” in May that was oversubscribed in can’t.”
four days. It doubled to €400m, They are at least trying to.
Thomas Schneider, with the seven and 10 year Some large institutional investors
Allianz Global tranches priced at the tight ends including AllianzGI, Talanx and VKB
Investors of margin ranges of 100bp-120bp have set up a working group to carve
and 120bp-140bp over Euribor. out a niche for themselves in the
It took a mere day for car parts Schuldschein market. They want to
maker Hirschvogel’s €100m lend to premium, or unquestionably
a new record in terms of volume, but deal to be fully subscribed. Seven investment grade, borrowers. Their
it was less dominated by benchmark and 10 year tenors were sold at the offer to issuers will be similar
sizes,” says Rudolf Bayer, head of tight ends of the 90bp-110bp and to the pitch investors in Euro
UniCredit’s private placement desk 110bp-130bp ranges. private placements make: fewer
in Munich. “Average volume was investors, offering larger tickets
down but the number of deals was Institutions squeezed and confidentiality, in exchange
significantly up”. Borrowers hold the whip hand in the for higher yields and financial
Some are finding it hard to adjust Schuldschein market. Any investor covenants.
to this racier pace of life. There was prepared to relax covenants or make “We know there’s corporate
a moment in June last year when 26 concessions on margins is instantly appetite for this sort of
borrowers were courting investors popular, while the stricter lenders arrangement,” says one institutional
— a staggering figure for an older are quickly directed to the back of lender. “And the other institutions
generation of investors, more used the queue. are on the same page, too.”
to dealing with that number over the This is particularly true for
course of a year. institutional investors, which are No favours
Some smaller savings and feeling the strain more than banks. Others have yet to be convinced
co-operative banks are struggling to Sticklers for financial covenants and borrowers will be interested in an
cope with the dealflow to the extent minimum margin floors, they used institutional premium Schuldschein
that they are asking arrangers to to have one selling point above all market.
slow down. else — a willingness to lend at tenors “Ultimately, it’s a seller’s market,
“We don’t want to be forced banks would not touch. and most of those sellers are
to choose between one issuer or But this is changing. Commercial interested in lower margins and few
another because we don’t have banks, as well as German savings covenants — it’s as simple as that,”
the time to look at both,” says one and co-operative banks, are now says one Schuldschein banker.
investor from a co-operative bank. prepared to buy Schuldscheine But this seller’s market could
8 | April 2018 | Private Debt Markets
008-09 Schuldschein investors 2.indd 8 25/04/2018 08:44SCHULDSCHEIN: INVESTORS
change if covenants and margins lost 70% of its stockmarket value Moody’s when it got into trouble.”
fall too far. Eventually, resistance in July last year, after declaring Steinhoff, as it affected more
will be felt. And there are signs, an £845m provision against bad Schuldschein investors, caused
albeit tentative, that investors are contracts. more concern than Carillion, which
beginning to dig their heels in. By January 15 it had gone into was a niche credit in the market. But
Telefonica Deutschland was liquidation after running out of the vast majority of Schuldschein
forced in late January to issue a cash, despite being the UK’s second participants believe that the
second round of price guidance largest construction firm and listed problem lies with the issuer, not the
on its €150m Schuldschein issue, on the London Stock Exchange. market itself.
after investors’ appetite turned out Shares in Steinhoff, the acquisitive However, 10-15 lenders to Carillion
weaker than expected. South African retail group, plunged and around 100 lenders to Steinhoff
The arrangers, DZ Bank and in early December and roughly still came up against the product’s
LBBW, launched it with margin 100 lenders were stuck with about illiquidity.
ranges of 55bp-65bp, 70bp-80bp, €630m of Schuldschein debt sold in As the issuers stumbled, the
80bp-90bp and 90bp-100bp over June 2015. investors struggled to work out
Euribor, for seven, 10, 12 and 15 year The question in hushed how to proceed, as there were few
tranches. conversations around Frankfurt was, previous cases to guide them, and
One German investor said: “I saw would Schuldschein investors freeze little secondary market activity.
Telefonica offering 55bp for a seven up after the Steinhoff and Carillion Investors usually have scant
year tranche and I thought, ‘Forget debacles? Many felt investors might appetite for selling Schuldscheine,
it’.” This was a view widely held by call for more financial covenants as they have traditionally had a buy-
investors and rival arrangers alike. and higher yields for the risks. and-hold culture. But that culture
“Our jaws dropped when that And yet, the optimists in those might change if more borrowers get
pricing came out — we certainly discussions have so far been proved into difficulty — a real possibility
weren’t [pricing Telefonica] at that right. There is little sign of a retreat after the credit cycle turns.
level,” said an arranger at a rival and last year’s issuance was a record Hoping to answer that need,
bank. After feeling the coolness of €27bn, by a record 153 borrowers. Debitos, a fintech company based in
the reception, the leads published It seems the shocks of Steinhoff Frankfurt, has launched a secondary
new guidance at the wide ends of the and Carillion were muffled because debt trading platform with a specific
ranges: 65bp, 80bp, 90bp and 100bp. of the nature of the Schuldschein focus on non-performing assets.
But pricing wasn’t the only reason investors themselves. Debitos says it has 298 investors
why the deal initially struggled. Traditional Schuldschein prepared to buy non-performing
Porsche and Rewe, considered lenders, like German savings and loans, including Steinhoff’s
quite similar to Telefonica co-operative banks, go through Schuldschein debt.
Deutschland among Schuldschein a painstaking analysis of credit “We have a bid out there from an
lenders, despite their very different quality. investor looking for Steinhoff tickets
industries, were marketing at the “You can’t do much if the audited up to €10m at 70, which is the best
same time, and some felt investors financial statements turn out to be bid out there,” said Timur Peters,
already had enough on their plate. questionable,” says Paul Kuhn, head managing director of Debitos in
“It’s hard to say about whether of debt capital markets origination mid-March.
we’ve reached a pricing floor, but at BayernLB in Munich. “Steinhoff “It’s not a surprise that with the
the market is certainly a little was rated investment grade by growth of the market come more
overheated,” says one similarities with capital
Schuldschein banker. markets more generally,”
Some investors even The Schuldschein accommodates issuers big and small says one commercial
say ultra-tight pricing bank lender.
Deal size up to €50m €50m to €100m
is a bigger reason for “Everyone needs
downscaling their €100m to €200m €200m to €500m over €500m
100% to adapt to the new
activities than credit normal, or else move
problems such as on.”
those at Steinhoff and 80% The relevance of
Carillion, both recent credit defaults in the
Schuldschein issuers. Schuldschein market
60%
is often overstated, and
Default response the same can be said
Just six months 40% for trading platforms.
after BayernLB and But in the rare case
HSBC had brought of credit difficulty the
Carillion to the 20% Schuldschein investor’s
Schuldschein market characterstic stance
for the first time, the as a buyer and holder
0%
UK construction and 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 might be shown to be
support services group Source: Helaba merely skin deep. s
Private Debt Markets | April 2018 | 9
008-09 Schuldschein investors 2.indd 9 25/04/2018 08:44SCHULDSCHEIN: ISSUERS
Can the Schuldschein stay on
top when rate climate changes?
The Schuldschein market attracted a record number of international issuers last year, and swept
aside other forms of European private debt in the process. Now it must confront a bigger beast — a
credit-hungry unrated public bond market — while simultaneously absorbing the impact of the
European Central Bank winding down its bond purchasing programme. Silas Brown reports.
AT FIRST glance, the Schuldschein Schuldschein, one banker in Frank- There is evidence that this position
markets of 2016 and 2017 might not furt noted. might hold some weight.
appear very different. After all, total Orpea, the French care homes Over 20 issuers have sold Schuld-
issuance ticked up only €1bn to group that is another prized convert scheine so far this year and super-
roughly €27bn. to Schuldscheine, followed in early market chain Rewe became the first
But each figure was rustled up March, selling €400m of bonds at to raise €1bn, pricing three, five,
using a different recipe. 200bp over mid-swaps. seven and 10 year fixed and floating
In 2016 total volume was carried Both issuers obtained substan- rate notes at the tight ends of margin
by larger companies like Lufthansa, tial order books — in Ubisoft’s case ranges: 50bp, 65bp, 80bp and 100bp.
Hofer and Porsche issuing €1bn-plus over €1bn — which drove the price “Throughout 2017 markets were
loans, alongside M&A-inspired activ- down to inside what they could have very stable,” says Kai Seeger, deputy
ity from companies like Groupe SEB achieved in the Schuldschein mar- head of UniCredit’s global syndicate.
and Mann+Hummel. ket, one banker noted. “But with more volatility you might
This was not the case in 2017, “Ubisoft could quite easily have see larger issuers using the private
when fewer large transactions took issued further Schuldscheine at debt markets more frequently again.”
place. Rated and unrated public benchmark size,” says Richard Wad- Telefonica Deutschland and Volk-
bond markets were more competi- dington, head of loan sales and pri- swagen Financial Services both
tive on price, so the argument for the vate debt at Commerzbank in Lon- raised over €500m in the first quar-
use of the Schuldschein became less don, but accepted the product’s ter. The former offered tenors of
persuasive. pricing advantage had diminished seven, 10, 12 and 15 years, while the
Kion was the only borrower to due to a hot bond market. This start- latter sold a two year Schuldschein to
break the €1bn mark last year. But as ed to unwind in the first quarter of a single investor.
Schuldschein investors grew more 2018, however. “There are many European cor-
comfortable lending to smaller inter- “The unrated market is much more porates with the capacity to place
national borrowers, the procession of volatile so perhaps it makes sense Schuldschein loans above €500m,
companies entering the market grew for borrowers to place bonds over with no execution risk whatsoever,”
longer. Schuldscheine when the conditions says Andreas Petrie, head of prima-
Average deal size fell a third to are strong,” says one Schuldschein ry markets at Helaba in Frankfurt.
€160m as roughly 150 firms raised banker in Frankfurt. “But we’re hop- “These issuers can treat the Schuld-
Schuldscheine. More than two fifths ing for less strength and stability [in schein as a useful source of [investor]
were non-German. public bonds] over the course of the diversification, and can help their
The formula for success in 2018 year, so we can convince corporates debt maturity profiles.”
will be to pluck the successful ele- that there is less execution risk in Some fear that if the larger borrow-
ments of both years and maintain private debt.” ers return en masse, there will be less
the flow of new arrivals, while draw-
ing the larger borrowers back.
The rise of unrated Schuldschein credits
Tangle with bonds
Rated Unrated
But the unrated public bond market is
proving a game competitor. For some 8% 11% 9%
15%
20% 21%
issuers, the pricing it offers is more 33% 36%
26%
attractive than what they could get in
the Schuldschein market. 76%
French video game developer
Ubisoft, which had issued €200m 92% 89% 91%
85%
80% 79%
of five year Schuldschein notes in 67% 64%
74%
March 2015, sold its first corporate
bond in January — a €500m five
24%
year note, priced at 85bp over mid-
swaps. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
This was tighter pricing than its Source: Helaba
10 | April 2018 | Private Debt Markets
010-11 Schuldschein issuers 2.indd 10 25/04/2018 08:44SCHULDSCHEIN: ISSUERS
space for smaller issuers, as arrang- “Many European puzzle will shift as a consequence.
ers and investors will be drawn to the corporates Some lenders, in particular Euro-
easier credit work and larger ticket could place pean commercial banks, have been
sizes that go with bigger companies. Schuldschein forced to enter the Schuldschein
“Who wants to go through the market looking for yield. As margins
loans above
stress of analysing some tiny Ger- rise again, there is concern that bank
€500m with no
man corporate debut Schuldschein lenders in particular might move as
execution risks
when there are blue chips on offer?” a block back to loan or public bond
whatsoever”
asks an international investor at a markets, which would affect the mar-
commercial bank. “It’s much more gins an international issuer could
Andreas Petrie,
work, the smaller the company is, achieve.
Helaba
and there is no necessary pick-up on One banker said commercial
spread — so it is more of a strain on banks’ original incentive to enter
resources, and from our perspective debt capital markets corporate origi- the Schuldschein market had been
larger borrowers are more cost and nation team in Munich. spread, but he hoped they had
time-effective.” Ulrich Kirschner, a senior credit become accustomed to the product.
Bankers also grumble about hav- analyst at Helaba, came to the oppo- Alongside the traditional qualities
ing to do the same work for a smaller site conclusion to Scope’s in a report of the Schuldschein, like low costs,
fee when a smaller borrower comes also published in January. lean documentation and no exter-
to the market, and argue that credit “In our opinion, the sound credit nal rating requirements, competitive
analysis is harder. Some sceptical metrics of unrated issuers indicate margins have drawn international
analysts believe an over-reliance on that the Schuldschein market con- borrowers to the market.
smaller, unrated companies could tinues to offer investors a broad There is a clear correlation. When
spell trouble further along the credit range of companies with a good ECB president Mario Draghi’s bond
cycle. investment quality,” said Kirschner. buying programme began in 2015
The report goes further, noting and margins fell for both private
Can small be strong? that the credit metrics of unrated debt and the bank loan market, the
With more unrated issuers entering borrowers are often more attractive Schuldschein broke its yearly issu-
the market than ever — three quar- than those of the rarer rated issuers. ance record, reaching €20bn. Yearly
ters of last year’s borrowers and four “The average earnings-based lev- volume continued to rise as average
fifths of volume, according to Hela- erage ratio for the group of unrated spreads fell, as bank lenders strove to
ba — a fierce debate has boiled up issuers was yet again below that of put their money to work.
between analysts over whether they companies with agency ratings in This tightening trend might be
will bring credit deterioration to the 2017,” Helaba said. reversed this year, and some banks
market. “In addition, the median ratio of have noticed that treasurers are
Scope Ratings, a rating agency net debt to Ebitda of 2.0 times, or aware of this.
in Berlin, urged caution in Janu- mean ratio of 2.2 times, saw a further As NordLB concludes in its outlook
ary. “Investors need to be careful improvement compared to the year for 2018: “Fears of a negative trend in
in assuming the high credit quality before.” the currently favourable refinancing
of the Schuldschein market in the Perhaps it is reassuring that ana- environment have, however, entered
past will automatically apply in the lysts, when confronted with the same the heads of issuers since the ECB’s
future,” it warned in a report. data, can disagree on it so funda- announcement of the implementa-
Scopes believes the credit difficul- mentally. tion of its exit strategy. We assume
ties of two Schuldschein issuers in But, whichever conclusions are that the necessary funding will con-
particular, Carillion and Steinhoff, correct, there would be less concern tinue to be brought forward in 2018,
illustrate a broader decline in the if investors felt better compensated to secure the currently favourable
market. for the risk. Even if there was no fall conditions.”
“It takes time for patterns to in credit quality, spreads fell some When the ECB withdraws, and pro-
become visible,” said a director at 20bp-30bp on average last year. vided margins rise as a consequence,
Scope, when the report was pub- This downward cycle of spreads this could affect private debt markets
lished. “Our prediction is it will should change as quantitative eas- across Europe more broadly.
become more visible over the coming ing subsides. There will be less pres- So far, the markets have large-
months.” sure on margins, and risk is likely to ly divided along lender lines, with
These sorts of conclusions, how- match reward more even-handedly. banks gravitating towards the
ever, are largely met with derision Schuldschein market and institution-
across the market. So long, ECB al investors using the Euro PP and US
“There may be a few niche issu- The broader conversation across pri- PP instruments.
ers that access the market with poor vate debt is turning to the effects of Once central banks retire from
quality, but it will never be the norm, the European Central Bank with- active duty and institutional lenders
as the lenders are too interested in drawing its monthly slug of stimu- feel less squeezed, they could migrate
credit quality and analysis to buy lus from the public bond markets. more into Schuldscheine and talk of
much sub-investment grade debt,” The Schuldschein market is trying to the harmonisation of European pri-
says Paul Kuhn, head of BayernLB’s work out how the pieces of the debt vate debt markets could return. s
Private Debt Markets | April 2018 | 11
010-11 Schuldschein issuers 2.indd 11 25/04/2018 08:44SCHULDSCHEIN: US ISSUERS
A new German export: the
Schuldschein’s American dream
The Schuldschein market has a grand ambition — to make it big in the US. Its reputation is growing
internationally but it will not be easy to take on the more established private debt instrument, the US
private placement note. Silas Brown asks: just how realistic is the Schuldschein’s American ambition?
IF SOMEONE SAID a few years back man savings and co-operative banks, most of its lenders are institutional
that Schuldschein desks would have and they have dollars to lend. investors prepared to lend at length.
outposts in New York, they would The market has started to offer dol- But it is still a dollar market, and
have been met with rolling eyes. And lar tranches. Last year 13 issuers — becomes less competitive when a bor-
yet, this is what is happening. Carillion, Ecom Agroindustrial, HTM rower is seeking euros.
Schuldschein originators from the Sport, Huhtamaki, Lonza, NAC Avia- However, there is rising activity for
German Landesbanks are stationed tion, Neopost, Oiltanking, Phoenix debut Schuldscheine from US issuers
in the US to hunt for clients, hoping Mecano, Porsche Salzburg, Qiagen, seeking euros.
to take business from the US private Tarkett and Volkswagen Financial Sherwin-Williams, the US paints
placement market, in particular. Services — took advantage of that. and coatings maker, closed its debut
“There are two clear ways we can The number of instances in which Schuldschein for €240m in Septem-
eat into US private placements so a US issuer can raise dollars with a ber last year through its Luxembourg
far in terms of price,” says the head Schuldschein more cheaply than with subsidiary. It had fixed and floating
of Schuldscheine at a German bank. a US PP is rare, but growing. The US rate tranches, and was sold at around
“Either with European issuers look- affiliate of the German Wacker Neu- 70bp over Euribor.
ing to raise dollars, or US issuers on The Baa3/BBB/BBB-rated borrow-
the hunt for euros.” er was the only US firm to access the
The two markets have different market last year, though participants
types of lenders. The US PP is domi- expect 2018 to be more fruitful.
nated by large insurance companies, “What is becomingly increasing-
prepared to offer big tickets at long ly popular is a US borrower raising
tenors, in exchange for stricter cove- Schuldscheine through a European
nants and illiquidity premiums. subsidiary,” says Petrie.
In Schuldscheine, over three quar-
ters of last year’s volume was bought More US issuers
by bank lenders, tending to prefer There are an increasing number of
shorter tenors, three to seven years, deals either issued or guaranteed by
and more comfortable with lighter US firms. Wabco Europe BVBA, an
documentation. So the SSD market industrial equipment supplier with
will have to play to its strengths to headquarters in Brussels, launched
attract clients from the US PP market. The US arm of Fresenius raised a €200m inaugural Schuldschein
There are signs of this occurring. dollars through a Schuldschein in February. It was guaranteed by
son issued $100m of five year dollar Wabco Holdings, listed in New York.
Yankee goldrush Schuldscheine in March, for example. The reverse is also happening.
If the market spreads to the US, it will The after-swap pricing was similar Fresenius US Finance II, the US
expand its borrower universe, not its to Wacker Neuson’s previous Schuld- arm of the German medical services
investor pool. US institutional inves- schein issue, a €125m five year sold in company Fresenius SE, raised $400m
tors are better served by the stricter 2017 at a spread of 55bp. in March 2016, with a Schuldschein
covenant packages in US PP notes, “The US company has to have a led by Helaba and HSBC. Before that,
and US bank lenders have not made strong name reputation in Europe, or Arcadis issued $127m through a US
overtures to Schuldscheine (although be affiliated with one that does, and subsidiary.
Citi is beginning to arrange some SSD be looking for mid-range maturities,” “More of this cross-pollination is
deals off its London MTN desk). says Andreas Petrie, head of primary expected, and will hopefully pro-
“The market has grown more markets at Helaba in Frankfurt, who vide purer US issuers good examples
attractive to US borrowers, but not arranged Wacker Neuson’s deal. of successful transactions, as well as
because of an influx of US investors,” Rudolf Bayer, head of UniCred- getting the international investors
says Paul Kuhn, head of DCM origi- it’s private placement desk, says: used to the borrowers from overseas,”
nation at BayernLB in Munich. “It is “The higher the link an issuer has to says one Schuldschein banker.
due to international investors from Europe the better. Especially Europe- But the likelihood of a big spike
Europe and Asia driving down pricing an investors require that link to apply in issuance from pure US borrowers
margins for international corporates.” for credit lines to invest.” remains somewhat limited, as long as
These international lenders are But beyond an eight year maturi- they have access to cheap (and long-
more comfortable investing in US ty, the US private placement market dated) funds elsewhere in their native
borrowers than more traditional Ger- becomes increasingly competitive, as markets. s
12 | April 2018 | Private Debt Markets
012 Schuldschein US 1.indd 12 25/04/2018 08:45Frankfurt Private Debt Roundtable
Keeping the Schuldschein’s
feet on the ground
Private debt markets have made inroads into European funding strategies over the past few years, taking transactions
from syndicated loan markets, as well as public bonds. The Schuldschein market has been particularly vibrant,
racking up €27bn of issuance in 2017 from more than 150 transactions.
Advocates argue its unique selling proposition is its ability to combine attractive pricing, lean documentation and
unparalleled flexibility. But the outlook is not all rosy, as doomsayers warn that pride may come before a fall through
the market’s next credit cycle.
GlobalCapital invited some of the Schuldschein market’s leading participants, including bankers, investors, issuers
and lawyers, to a roundtable in Frankfurt in mid-March to discuss the state of European private debt markets, and
what the future might hold for them.
Participants in the roundtable were:
Klaus Distler, executive director of origination, Helaba Stefan Scherff, head of corporate Schuldschein origination
for Germany, Switzerland and Austria, Commerzbank
Oliver Dreher, head of debt capital markets practice, CMS
Thomas Schneider, head of European corporate loans,
Michael Lamla, head of corporate banking, Allianz Global Investors
Agricultural Bank of China
Felix Warmuth, group treasurer, RHI Magnesita
Patrick Mannl, director, UniCredit
Zsófia Zséger, head of group funding, MOL
Johannes Mayr, economist, BayernLB
Silas Brown and Toby Fildes, moderators, GlobalCapital
: Private debt has made some very good from the crisis was to diversify your funding base.
ground over the last four or five years in Europe.
Is it continuing to rise up the agenda for corporate Klaus Distler, Helaba: Maybe one additional point is
treasurers? And if so, where are we in its evolution? the policy agenda, right? There’s an additional push
for these market segments, and especially smaller
Stefan Scherff, Commerzbank: Where we are going companies, as a result of the Capital Markets Union.
to be in a couple of years is a tough question. The rise We have to think more broadly about where the addi-
in volume has been for good reasons, though. We have tional Schuldschein volume is coming from. Private
flexible products and I think that’s not only true for debt has eaten into the loan market, and in particu-
Schuldscheine but many private debt instruments. You lar the German loan market has declined, while the
can tailor them to your needs, in a way not possible Schuldschein has gone up significantly.
with other instruments. Syndicated loans are fixed in
that structure to a certain extent, and even more so cor- Thomas Schneider, AllianzGI: When I started at
porate bonds. Allianz, the Schuldschein was a product in the bottom
drawer of investment bankers’ desks. But as it’s grown,
Patrick Mannl, UniCredit: The prominence of the institutional investors like us still play a very limited
Schuldschein product in Germany is incredible. Ten role, and we still have the Schuldschein market in
years back there was a market size of €5bn and now you the hands of banks. We still don’t have a real alterna-
have some €25bn-€27bn — that rise gets it on to the tive lending market and this is something we should
agenda of every treasurer. One of the big lessons learned change, to make the product even more attractive.
Private Debt Markets 13
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