private debt · customised solutions for all issuer‘s needs. eur 600,000,000 1.625% senior bonds...

June 2019

Sponsored by:

PRIVATE DEBT

000 Front Cover.indd 1 11/06/2019 18:25

EUR 600,000,000

1.45% Senor Notesdue 2022

Bookrunner

Oct 2018 Czech Rep.

Recent Capital Market Solutions inspired by RBI:

USD 600,000,000

6.20% Sovereign Bondsdue 2030

Bookrunner

Feb 2018 Belarus

Republic of Belarus

Experience extending beyond Central and Eastern Europe. Customised solutions for all Issuer‘s needs.

EUR 600,000,0001.625%

Senior Bonds 1.625% Senior Bonds

due 2026

Bookrunner

Apr 2018 UK

www.rbinternational.com

EUR 225,000,000CZK 495,000,000

Schuldschein loandue 2023/2025/2028

Bookrunner

May 2018 Germany

EUR 1,500,000,000

10-years and 50-years Fixed Rate Dual-Tranche

Bookrunner

Jun 2018 Slovakia

Republic of Slovakia

HRK 10,500,000,000

Fixed Rate Note Tapsdue 2023 / 2029

Bookrunner

Jul 2018 Croatia

Republic of CroatiaEUR 500,000,000

EUR 500,000,000

0.75% Senior Bonds due 2023

0.875% Senior Bonds due2028

Bookrunner

Nov 2018 Austria

EUR 500,000,000

0.875% Senior Bondsdue 2022

Bookrunner

Nov 2018 Czech Rep.

EUR 500,000,000

0.25% Covered Bonds due 2021

Bookrunner

Jan 2019 Poland

EUR 1,000,000,000

1.50% Green Bondsdue 2025

Bookrunner

Jan 2019 Italy

EUR 500,000,000

0.75% Landesschatz-anweisung due 2034

Bookrunner

Mar 2019 Germany

German Federal States

EUR 1,000,000,000

0.625% Landesschatz-anweisung due 2029

Bookrunner

Feb 2019 Germany

RBI_AZ_Tombstones_0419_210x297_Awards_RZ.indd 1 4/10/2019 11:54:49 AM

Private Debt | June 2019 | 3

PRIVATE DEBT

4 OVERVIEW

Private debt: a Goldilocks moment

8 FRANKFURT PRIVATE DEBT ROUNDTABLE Schuldschein eyes Italy and Iberia as green shoots appear

16 INTERNATIONAL SCHULDSCHEIN MARKET

New frontiers: the Schuldschein ventures beyond home borders

18 VIENNA PRIVATE DEBT ROUNDTABLE Schuldschein expands eastward in a digital age

28 DIGITALISATION OF THE SCHULDSCHEIN

Schuldschein sizes up digital crowd as 11 compete for crown

30 PARIS PRIVATE DEBT ROUNDTABLE Companies find new ways to link up with alternative lenders

39 EURO PP

Euro PP: not dead, but in hiding

40 LONDON PRIVATE DEBT ROUNDTABLE US PP buyers stay strong on UK as SSD goes international

50 US PP AND BREXIT

US PP market swells amid Brexit uncertainty

51 US PP AND UK LOCAL AUTHORITIES

City of London sparks PP interest in UK councils

Euromoney Institutional Investor PLC8 Bouverie Street, London, EC4Y 8AX, UKTel: +44 20 7779 8888 • Fax: +44 20 7779 7329

Email: [email protected]

Printed by methodUK

Managing director, GlobalCapital group: John Orchard Director: Ruth Beddows Managing editor: Toby FildesEditor: Ralph SinclairContributing editors: Nick Jacob, Philip Moore

PEOPLE & MARKETSPeople and markets editor: Jasper Cox

PUBLIC SECTOR and MTNs SSA and MTN editor: Craig McGlashanSSA reporter: Burhan Khadbai MTN and niche currency reporter: Frank Jackman

FINANCIAL INSTITUTIONSBank finance editor: Tyler DaviesCovered bond editor: Bill Thornhill Bank finance reporter: David Freitas

SECURITIZATIONGlobal securitization editor: Max Adams European securitization reporter: Tom Brown US securitization reporter: Alex Saeedy US securitization reporter: Jennifer Kang

CORPORATE FINANCING:Corporate finance and sustainability editor: Jon Hay Leveraged and structured credit editor: Owen SandersonEquities editor: Sam Kerr Syndicated loans and private debt editor: Silas BrownIG loans reporter: Michael TurnerSenior equities reporter: Aidan GregoryEmerging market loans reporter: Mariam MeskinCorporate bonds reporter: Alex Radford

DERIVATIVES Derivatives editor: Ross Lancaster

EMERGING MARKETSEmerging markets editor: Francesca YoungEmerging markets deputy editor: Lewis McLellan Latin America reporter: Oliver West

Design and production manager: Gerald Hayes Deputy design and production manager: Rosie WerrettProduction: Andy Bunyan, Antony ParselleNight editor: Julian MarshallSub-editors: Tom Pumphrey, Richard Cosgrove, David Jones, Olivier Holmey Cartoonist: Olly Copplestone • [email protected] director of events: Daniel Elton +44 20 7779 7305

Publisher: Oliver Hawkins +44 20 7779 7304

Marketing Claudia Reyes Marquez +44 20 7827 6428Josh Pearson +44 20 7779 7388Customer Services: +44 20 7779 8610

SubscriptionsJames Anderson +44 20 7779 8338 Katherine Clack +44 20 7779 8612Mark Goodes +44 20 7779 8605Philip Huntsman +1 212 224 3294

Directors: David Pritchard (Chairman), Andrew Rashbass (CEO), Sir Patrick Sergeant, Andrew Ballingal, Tristan Hillgarth, Imogen Joss, Tim Collier, Kevin Beatty, Jan Babiak, Lorna Tilbian, Colin Day, Wendy Pallot

All rights reserved. No part of this publication may be 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, however caused.

© Euromoney Institutional Investor PLC, 2019 ISSN 2055 2865

001 Contents.indd 3 11/06/2019 19:13

4 | June 2019 | Private Debt

OVERVIEW OVERVIEW

PRIVATE CORPORATE debt, once confined to isolated bases in Europe — the Schuldschein’s German Mit-telstand fastness and the US pri-vate placement’s beachhead among investment grade companies — has spread across the continent.

Once an acquired taste of sophis-ticated treasurers, it is now on the menu proffered by every bank to corporate clients.

Euro private placements as small as €3m have been done in France; car parts maker ZF Friedrichshafen borrowed €2.2bn with a Schuld-schein in 2015, its capital markets debut.

Russian, Chinese and Indian bor-rowers have issued Schuldscheine; it might even catch on in the UK one day.

Market practitioners argue per-manent changes in capital markets have brought this about: stricter regulation for banks making them de-emphasise lending; the growth of institutional savings seeking yield; companies learning it is safer to have a variety of funding sources.

“The market share of the private placement market versus the public bond market has clearly increased over the last decade,” says Ed Bark-er, vice-president at Pricoa Capi-tal Group, one of the biggest US PP lenders in the UK.

“There are many reasons why the

PP market is attractive to compa-nies. We advise companies to use all markets.”

Public bonds often require issu-ing a benchmark size, ratings, road-shows, registration — unnecessary with PPs.

But cyclical trends are also at work. This expansion has hap-pened during a bull run for cred-it which has now lasted 10 years. After a decade of stimulus, interest rates still show no sign of peeling themselves off the floor.

No one would claim that these conditions will last forever — and while the end is not yet in sight, it never is.

The more aggressive direct lend-ing funds, which have raised bil-lions to invest in leveraged compa-nies, have been on many financial players’ trouble watchlists for years.

But for the time being, the upper end of private debt is enjoying benign growth — not too fast, nor too slow, and without, apparently, losing its discipline on credit.

Fruitful chaosAt a time like this, two themes thrust themselves forward. One is the sheer variety of European pri-vate debt markets.

“European issuers have quite a few options,” says Kai Seeger, dep-uty head of global syndicate at Uni-Credit in Munich. “The Euro PP, the Schuldschein, potentially reg-istered bonds that are not public. The issuer can pick among these instruments and select the target investors — with the Schuldschein mainly banks, with the Euro PP real money accounts, mutual funds, but if you go to longer maturities also pension funds and insurance com-panies.”

How these markets rub up against each other is a source of endless interest. There are few hard bound-

aries or exclusions, but in practice not many companies know enough about all the markets to make a transparent comparison, based on the hard facts of price and terms.

As is clear from the roundtable discussions in this report, the pri-vate debt choices offered to — and

favoured by — any company still depend on cultural and national factors. As Patrick Klein, treasurer of the sophisticated Italian issuer Buzzi Unicem, points out, he was only recently told the French-based Euro PP market existed.

“The only European country that the Schuldschein has had real dif-ficulty in is the UK,” says Andreas Petrie, head of primary markets at Helaba in Frankfurt. “It’s not the investors who are reluctant, it’s the issuers. The main reason is they are closer to the US PP type of thinking; they are used to using this market.”

That may be because UK banks never pitch the Schuldschein to their clients. The German banks have barely begun to start market-ing it in the UK.

France offers a sharp contrast. All the big French banks now have Schuldschein desks and arrange deals for their clients. This is not mainly because of cultural affinity, but pricing.

French companies wanting euro private debt have been tempted

Europe’s private debt markets are progressing admirably. More and more companies are issuing, or at least aware of the possibility — and they have a varied choice of markets. Players in the Schuldschein and US PP markets are confident and looking ahead to new opportunities, as the products grow in geographical reach, asset class and technique. As Jon Hay reports, there’s just one snag — the credit cycle is nearing its end.

Private debt: a Goldilocks moment

“The market share of the private

placement market versus the public bond market has clearly increased

over the last decade”

Ed Barker, Pricoa Capital Group

“There has hardly been a moment

when we thought there were too

many deals”

Michael Bures, Raiffeisen Bank

International

004_PD_Overview2.indd 4 11/06/2019 19:06


OVERVIEW OVERVIEW

away from the Paris-based Euro PP market by the keen Schuld-schein pricing offered by German and international banks, wanting only to earn a credit spread — not the positive return after inflation sought by institutions.

Neopost, the postal machinery maker which issued its first US PP in 2003, is a classic French Schuld-schein recruit. Christophe Liau-don, its group treasurer in Bagneux, is one issuer who does rigorously weigh up the three markets when preparing a financing.

“Each market has its pros and cons,” he says. “The Euro PP has some advantages for French compa-nies — the proximity with investors, maturity of the debt, the capac-ity to adapt legal paperwork to the needs of the company. But that has a price. The Schuldschein pricing is pretty aggressive compared to the Euro PP.”

Neopost placed a €210m issue in the German market a few weeks ago.

Faced with losing clients to the Schuldschein, French banks have decided “if you can’t beat ’em, join ’em.” That is just the route trodden by UK banks to the US PP market 20 years ago.

While French asset managers have lost deals to German savings banks and Asian commercial banks, their UK peers have been able to join the US PP market, since its lenders are also institutions.

But the US life insurers are fierce competitors. With US public bond spreads as their guide and a favour-

able basis swap putting juice in their engines, US life companies have regularly beaten indigenous institutions to euro and sterling pri-vate deals in recent years.

“Historically people thought of the PP market as materially wider than the public market,” says Barker at Pricoa. “I don’t think that’s been true at all in the UK in recent years. There probably is still a premium but it’s pretty minor, less than 20bp, and in addition there’s arguably more demand in the PP market.”

The number of UK institutional investors in the public bond market was quite limited, he argued, com-pared with the pool of US money available in privates.

Bulking upThe second theme — intertwined with the variety of private debt markets — is how they are likely to grow.

“The US PP market used to be a $50bn issuance market, in 2017 it was above $80bn, and last year it reached $100bn,” says Michael Bures, head of debt capital markets, corporates, at Raiffeisen Bank Inter-national in Vienna. “Though this is a very big market, it has really man-aged still to grow.”

Some imagine the Schuldschein swelling from last year’s €26bn issuance to €50bn. Bures thinks this will be difficult, partly because most deals are about €150m. “There has hardly been a moment since the Schuldschein boom started when we thought there were too many deals and investors didn’t want to

buy them,” he says. “But unless there is a significant move from big-ger issuers to the Schuldschein mar-ket, it will be hard to get to much bigger numbers.”

Big companies tend to visit when public markets are tough, but in those circumstances financing vol-umes overall tend to be depressed.

Petrie’s glass is half full, how-ever. “We will most probably see a new record year in 2019,” he says. “In the first half we have more or less topped last year’s volume and we are close to the figures of the year before that. The market is con-stantly increasing, driven mainly by three factors. The number of inter-national issuers outside the Ger-man-speaking region has dramati-cally increased. We’ve seen at least 10 to 12 French deals this year and a lot of Scandinavians.”

Some bankers are hunting deals in Asia and emerging markets; oth-ers in Italy and Spain (see page 16).

Second, Petrie cites the market’s introduction last autumn, in co-operation with the Loan Market Association, of new standardised documents. Schuldschein terms were never complicated, but now that all banks are using the same ones, instead of their own versions, documenting a deal is much easier.

Institutional interest growsThe third factor is new interest from institutional investors, hand in hand with new asset classes. “Eve-rything that has to do with mortgag-es and real estate investment, that leads to a stronger involvement of long term-oriented investors, so we see more insurance companies com-ing in, not only German ones, but on a European basis,” says Petrie. “They are especially looking for long maturities, 10 years-plus.”

Schuldschein investors are tra-ditionally wary of property issuers, for fear of being structurally subor-dinated to their mortgage debt. It is difficult to make a Schuldschein secured, because there is no trustee and the loans are bilateral.

But seven or eight of Germany’s 1,000 housing companies have come to the market with unse-cured deals, opening a completely new segment with fresh issuers and investors. It can only be a matter of time before Schuldschein bankers

Average issuer indebtedness only slightly higher

Adj. net debt / EBITDA

2.32.5 2.4

2.72.4

2.2

2.5

2.42.5

2.52.9 2.8

2.4 2.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2010 2012 2014 2016 2017 2018

Median

Mean

Schuldschein issuers’ average indebtedness is stable

Source: Helaba Research

Adjusted net debt/Ebitda

004_PD_Overview2.indd 5 11/06/2019 19:06


OVERVIEW OVERVIEW

call on the UK housing associations who have in recent been busy users of private placement debt markets.

Still freeAs private debt markets grow, they are facing new trials. One the Schuldschein market has so far largely avoided is a tightening of regulation.

But the trend towards authorities seizing control is strong in markets, and some voices argue the Schuld-schein’s freedom from rules such as the Markets in Financial Instru-ments Directive and the Market Abuse Regulation is an anomaly.

“It is hard to predict what regula-tors will do,” says Bures. “Regula-tion can play a favourable role, or it can be bureaucratic. There are examples of really good regula-tion, like the Prospectus Directive and passporting. The danger is we get MiFID and MAR, which would increase the cost and make day-to-day business slower. I hope the Schuldschein will still be treated as any other loan.”

The regulators could decide to regulate Schuldscheine more tightly than ordinary club or syndicated loans, but Bures hopes this process can be avoided or pushed back if banks continue to be disciplined as arrangers and “not cause any trou-ble by going down the credit curve”.

Schuldschein fees are under pres-sure, both from price cuts and issu-ers using more arrangers on deals. That is one reason banks are so eager to make issuance more effi-

cient through digital platforms (see page 28).

But in one respect, Schuldschein banks are lucky. So far, deals are nearly always arranged by a bank.

That is not true in US PPs. “Bilat-eral issuance has taken share from agented issuance to a significant extent,” says Barker. “We are biased — we do a lot of that business — but we think there are few reasons to use an agent.”

Companies wanting £500m-plus will definitely need several inves-tors, and if the issuer wants a big group, Barker acknowledges agents make sense.

But while the best agents listen to issuers and fashion bespoke deals to suit their needs, he says others offer “cookie cutter” trans-actions, with little flexibility on tenor, size or number of investors. For deals like this, issuers will still need to do a roadshow and issue a certain size of deal, much like a public bond.

“A number of companies have done club deals themselves, and gone to a few investors,” he says. “They don’t need a full-blown agented deal. For companies that want £200m or lower, you can get it all from one investor.”

Barker argues the PP market is now transparent enough that issu-ers know what their credit should sell for. Not only can they cut out fees, but investors will often give them a better price if they borrow directly. Pricoa does over half its investing bilaterally.

This direct traffic is like a PP mar-ket within the PP market.

The Schuldschein also has its secret annex where deals are done unnoticed, although usually still via banks.

“There are public invitations in the Schuldschein market when big companies are issuing, but this is a private market,” says Rudolf Bayer, head of MTN and private debt syn-dicate at UniCredit in Munich. “You can do this with just an issuer and an investor and bring them togeth-er, because neither wants it to be public.”

Petrie estimates “a grey figure of minimum 5%” on top of the trans-parent Schuldschein market, or about €1bn-€2bn of corporate paper a year.

Missing a trick?Yet there are surprising differences between the three markets. A trump card of US PP investors is offering deals with delayed draws. The bor-rower might take some money now, but other tranches in six or nine months’ time. This can be highly convenient for borrowers, and is a big advantage over public markets.

With typical efficiency, the US market has standard rates of pick-up investors receive for granting delays.

Euro PPs offer similar flexibili-

ty — many deals are staggered over two or more issuance dates.

But in the Schuldschein market, where nearly all lenders are banks, which ought to be able to provide liquidity, this happens very rarely, and only for prominent issuers, says Bures.

This could be an area for the Schuldschein market to explore.

Maturities are another differentiating factor. The US PP

Volume of SSDs placed by credit quality criteria (in %)

Number of first-time and regular issuers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2010 2012 2014 2016 2017 2018

Revenue > €1bn andNet debt /EBITDA < 3.0x

Revenue < €1bn andNet debt /EBITDA < 3.0x

68 5534 45 52 44 48 46

63 6752

10

8

23

39

2543 55

36

5864

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Baseyear

Newcomer

Not Newcomer

More than half of Schuldschein issuers are large and modestly geared


“The only European

country that the Schuldschein has had real difficulty

in is the UK”

Andreas Petrie, Helaba

004_PD_Overview2.indd 6 11/06/2019 19:06


OVERVIEW OVERVIEW

market is the traditional leader, with 12 year deals common and 15 and 20 year notes available for the right kinds of borrower.

But the extreme lows of euro interest rates in the past five years have forced even the German savings and co-operative banks to buy longer Schuldscheine. “Especially for domestic deals in Germany and Austria, investors are tending to go to longer maturities — seven and 10 years,” says Bayer. “If you calculated the average maturity over the last two years, compared with four years ago, for sure it is longer.”

Maturity is a principal consideration in another private market — Euro-MTNs. “These deals are negotiated, too,” says Bayer. “For me this is a private placement market. Sure, it’s issued based on an EMTN programme, which has standard terms and conditions, but it’s a market where investors are looking on a private basis for particular credits and formats.”

Many issuers may not want to issue a €500m bond at 20 or 30 years, but may be happy to lock in

very attractive yields for €50m or €100m.

“On the long end, usually it’s very hard to judge if an MTN has come tighter or wider than the issuer’s curve, because there are hardly any comparables,” says Seeger.

Sometimes the issuer may appear to have got a good deal, relative to its curve, sometimes the investor, but ultimately both are meeting their needs. “It’s a matching exercise,” Seeger says.

The other hotspot for MTN busi-ness is the short end, especially up to two years where public bonds are rarely issued. “There is a lot of demand for short dated paper, and

issuers can achieve very attractive conditions,” says Seeger. “It’s usual-ly below the benchmark curve, but it can vary.”

Last ordersSooner or later, however, Europe’s credit party must end. In a recent survey by Preqin, the alternative assets data provider, 55% of pri-vate debt investors believed the asset class was overvalued, and 35% predicted a correction within 12 months.

“My personal view is that over the next 18 months there is going to be some sort of economic correc-tion,” says Barker. “There are quite a number of trends that are not dis-similar to 2006. Capital availability is really high, which is pushing LBO leverage and acquisition multiples very high. That is often followed by a correction. The drivers will be dif-ferent from the financial crisis and the impact will be different. Corpo-rates are in better shape now than in 2006-7, particularly big corpo-rates. Leverage levels are better, liquidity is better, so their ability to withstand negative market shocks should be better.”

Some parts of the private debt market are going to get hit, howev-er. Several retail and construction companies are already under pres-sure, and the defaults of Carillion and Interserve, with scanty recover-ies expected, have given a foretaste of things to come.

But even the cautious Schuld-schein market, with 150 deals a

year, half of them from new issuers, is going to suffer some defaults.

The catalyst is not clear yet — it could be a hard Brexit.

When the time comes, private debt investors’ claims to be careful, rigorous credit underwriters will be tested.

Helaba surveys key credit metrics of outstanding Schuldschein issuers every six months, and has not noticed any deterioration.

For Bures at RBI, the Schuldschein is structurally unsuited to risky lending.

“We tend to do relatively covenant-lite deals, and it’s unusual to have a margin grid, so you need companies that will be stable for the life of the deal, because there’s no buffer if the ratios worsen,” he says. “And given German civil law, you can’t enforce majority decisions on the minority, so it’s good to avoid restructurings. Experience shows that banks have much lower tolerance for loan losses than institutions. They won’t go into riskier investments — the last thing they want is impairments on their loans. The Schuldschein market is not the place to go down the credit curve and test how far you can go. The typical investors in this market are not the right ones.”

Private debt markets came through the last crisis well. For them to get through the next one, after so much expansion and inno-vation, may depend on whether the changes of the past decade have left their essential nature unaltered. s

Volume of SSDs placed by credit quality criteria (in %)

Number of first-time and regular issuers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2010 2012 2014 2016 2017 2018

Revenue > €1bn andNet debt /EBITDA < 3.0x

Revenue < €1bn andNet debt /EBITDA < 3.0x

68 5534 45 52 44 48 46

63 6752

10

8

23

39

2543 55

36

5864

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Baseyear

Newcomer

Not Newcomer

Newcomers well represented in the Schuldschein market


“Each market has its pros and

cons. The Euro PP has some

advantages for French companies”

Christophe Liaudon, Neopost

004_PD_Overview2.indd 7 11/06/2019 19:06

8 Private debt

The Frankfurt Private Debt Roundtable

NEW SECTORS AND MARKETS

: The Schuldschein market is very popular internationally, and has maintained an impressive volume of issues from debut and inter-national issuers for the past three years. Where is the most fertile ground for arrangers to search for new borrowers this year?

Irene Öhlinger, Raiffeisen Bank International: Central and Eastern Europe was definitely a region we focused on last year. There are really a lot of issuers keen on the Schuldschein there. They like the simplicity of the prod-uct and the lean documentation and process. Also these

tend to be the issuers well established in their indus-tries, so they bring a lot of value to the Schuldschein investors. But in terms of growth for this year, we see significant interest from southern Europe, namely Italy and the Iberian region.

: We’ve seen Pirelli, and we’ve seen Buzzi Unicem from memory, but there have only been a few from those countries.

Patrick Mannl, UniCredit: Buzzi had been active in the market via its German subsidiary Dyckerhoff years before. In 2017 they decided on a dual structure, where Dyckerhoff issued with a Buzzi guarantee, with the other guarantee just from Buzzi solo.

Participants in the roundtable were:Klaus Distler, head of corporate debt capital markets, Helaba

Sebastian Glock, co-founder of VC Trade

Michael Lamla, head of corporate banking, Agricultural Bank of China Frankfurt branch

Fabian Lander, head of corporate finance and sustainability, Volkswagen Immobilien

Patrick Mannl, director, debt capital markets origination, UniCredit

Laurent Nittler, relationship manager, corporate and investment banking, China Construction Bank

Irene Öhlinger, debt capital markets, corporates, Raiffeisen Bank International

Silas Brown, loans and private debt editor, GlobalCapital (moderator)

Schuldschein eyes Italy and Iberia as green shoots appear

The Schuldschein market has kept up its momentum across Europe and elsewhere, but two regions have been curiously quiet. Iberia and Italy have implied investment grade borrowers well suited to the market, yet only a few have been tempted to use it. Are there barriers to entry and how can they be overcome?

On the topic of green issuance, market players feel the Schuldschein is well suited to it. Certainly all green Schuldscheine to date have been comfortably placed, but as there are few green investment portfolios, pricing has not yet moved for issuers. Will that change in the coming year?

GlobalCapital invited prominent Schuldschein participants, including bankers, investors and issuers, to a roundtable in Frankfurt, the home of the Schuldschein market, in May to discuss these topics. A leading digital platform also attended to set out its stall — and answer the market’s questions.

008_Private debt Frankfurt RT_s.indd 8 11/06/2019 18:28


Private debt 9

This was the first transaction after the tax regime change — in the years before there were a few, but they didn’t issue directly via Italy.

For Pirelli, it’s very interesting, and I think it was a similar experience with other international issuers: these issuers aren’t doing Schuldscheine simply because it’s a Schuldschein and it’s become a prominent funding instrument. They are doing it because they save a lot of money.

They are always looking at the Schuldschein market versus the secondary market in bonds, deciding on one

or the other. If you’re in a situation where you can save up to 70bp like some of these names, why wouldn’t you go to the Schuldschein market?

Of course, what has made that easier in the past few years is you can now do €500m-plus transactions, which is often a trigger for larger names.

: But if the pricing’s there for Italian issu-ers, what has prevented the bulk of them from doing it already. Familiarity?

Mannl, UniCredit: We saw the first transaction in France five or six years ago. If you have a track record of five or six transactions from that country, it’s only a matter of time for the seventh, eighth and ninth to come. Italy is still young in that respect.

Öhlinger, RBI: Italy has been very much a closed market, where a lot of funding took place locally. Of course, it takes time for these issuers to acknowledge, and they may have to pay a little more over local funding initially, but they’ll start to appreciate the Schuldschein instru-ment for the additional benefits, like access to new inves-tors.

: Klaus, from your perspective, is accessing new investors the most attractive selling point for debut names, apart from pricing?

Klaus Distler, Helaba: With the Schuldschein market you can broaden your investor base, as well as find a new source of funding beyond bilateral and syndi-cated loans. This is not just in Germany, where the Schuldschein is well established, but across Europe and other parts of the world. Last year we had over 100 issu-

ers and roughly 50% were new issuers.

Fabian Lander, Volkswagen Immobilien: If I under-stood you all correctly, a Schuldschein issue can price more tightly than bonds. But in my experience, the arranging banks tell me that the basis for pricing a Schuldschein is the secondary bond curve. In our latest transaction, we priced it a little tighter than Volkswagen’s curve, and I couldn’t understand why. Last year, it was priced a little wider, and then the arrangers told me it was to do with the illiquidity of the instrument, but then this time some investors said they couldn’t buy our Schuldschein because it was too far inside our bond curve.

Mannl, UniCredit: Of course, that’s interesting. There are situations like this where you have an external rating where a bond is cheaper or wider, in particular when the borrower is in the triple-B area. It’s slightly more difficult to find the market environment where this is true for a single-A company.

Distler, Helaba: At the beginning of this year, you had heavy widening in the bond markets, and so the Schuldschein became more attractive — but this has changed now. Whether you can price a Schuldschein inside or outside your bond curve depends on ratings, and timings, and the comparative liquidity in each mar-ket. We’ve had pricing compression in the last few years. The median spread for five years was 100bp in 2017, and then in 2018 it was 85bp. This year it’s back up to around 95bp. This is largely derived from the bond mar-kets.

Mannl, UniCredit: If you look at some French issu-ers in the market, there was a huge arbitrage in their Schuldschein transactions compared with their bond prices, where the Schuldscheine came tighter.

: Fabian, what attracts you to the market? You said that pricing was quite attractive versus the bond markets. But is that it?

Lander, VW Immo: For our funding requirements, a vanilla bond is too expensive, particularly documenta-tion-wise, as we need less than a benchmark size. Our requirements, as a small and medium sized enterprise within a larger blue chip, are usually around €100m to €200m a year, so the Schuldschein is perfect for us, liquidity-wise.

The granularity of a Schuldschein is a massive positive, compared with term loans. Industry and group limits due to high exposures will be mitigated, as the ticket sizes of Schuldschein lenders are usually smaller compared with term loans.

For us, a green issuer, it is essential that we provide green capital for green assets. It is part of our holistic sus-tainability approach and our corporate DNA. We think green SSD increases the credibility of our sustainability strategy, broadens our investor base and is a perfect complement to our funding sources.

: Michael, back to the original question, what would you most like to see more of in the market, in terms of region and sector?

Patrick Mannl UniCredit



10 Private debt

Michael Lamla, Agricultural Bank of China: With regard to regions we are pretty open but we want to know the clients we invest in, not necessarily for cross-selling, but for credit risk purposes — this is particularly important if you keep situations like Steinhoff in mind, which we weren’t in, luckily.

That’s why we cover Europe from different branches. In terms of sector, we are very open. We don’t have any sector we exclude, however we need to understand the business model. Things like biotechnology, for example, where we don’t have any specialists, we might find hard to invest in.

INVESTMENT APPROACH: Laurent, Schuldschein investors are

known for their credit work, so perhaps it’s antithetical to think they’d rule out certain sectors. What’s your investment approach? Is it similar to Michael’s?

Laurent Nittler, China Construction Bank: We can operate in all European countries, thanks to our European passport. We have several branches across Europe, that communicate with one another, and we

don’t have a strong focus on any particular country. But, of course, most of the action comes from Germany, Benelux and France. We have a young portfolio — we don’t have a portfolio that has existed for 20 years, so we don’t have long relationships. Most issuers are new clients for us, so we have to work out what their busi-ness model is, what’s their approach and who are their clients. One challenging thing is that most issuers don’t have an external rating, which can be difficult, especially when the market’s very busy and transactions, especially from Germany, can close in a matter of days.

: At the time of this roundtable, there are roughly 20 transactions in the market, which is very busy. For you, is that difficult to process?

Nittler, CCB: January was kind of slow, and now every-thing’s going on! Our workload depends on whether there’s a peak. We try to analyse everything, but some-times we have to find a compromise.

We may be a global bank, but in Europe we are young

and new, so we have to do whole credit portfolio analysis.

: As a Chinese bank approaching new issuers, when you buy a Schuldschein, do you consider the idea that this may develop into a longer lending relationship?

Nittler, CCB: For us and most Asian banks — and tell me if you agree Michael — the Schuldschein issue is a door opener to get to know the customer.

Lamla, ABC: At Agricultural Bank of China, we have local credit approval, which is why we can be pretty quick at committing, compared with other foreign banks. Also, it is not compulsory for our customers to have a link to China, which is why we have also what I call German-German customers — with local activities such as construction, manufacturing, utility etc.

Lander, VW Immo: May I ask a question? What is the proportion of investors that are German? My feeling is the majority is still German? In our last transaction, we didn’t see any, say, Italian or French lenders.

Öhlinger, RBI: In the CEE region, there are investors interested. You have banks that are highly liquid in the Czech Republic, Slovakia and Hungary, for example, and even further east. Of course, their pockets are less deep.

Distler, Helaba: There are good reasons for this. One is that they already know their clients on their home turf. But also, funding costs. It makes less sense for those CEE lenders because of their relatively higher funding costs, from the east. So investing in the Schuldschein at lower prices is harder for them.

: People constantly talk about debut issu-ers, but are there more new investors accessing the market? There are already some lenders from Latin America, and many from Asia. But are there more to come, Klaus?

Distler, Helaba: Yes, absolutely. But you have to first ask, why are these overseas investors coming to the Schuldschein market? Why are Asian banks so heavily represented? That’s because the Asian guys are based in Europe, and they have a linkage therefore to the Schuldschein market. Investors also tend to follow issu-ers from their region, too.

Nittler, CCB: With the Schuldschein instrument, we had a long learning curve inside our bank, especially for our credit committees, which are still majority Chinese. We as European bankers have to explain the different European instruments, and that’s sometimes hard when there’s negative publicity.

GREEN SCHULDSCHEINE: Let’s move on to sustainable finance.

The green Schuldschein has become something of a theme over the past few years, but it hasn’t turned into anything near a groundswell. Patrick, is there a particularly hopeful future for green issuance of Schuldscheine?

Laurent Nittler China Construction Bank



Private debt 11

Mannl, UniCredit: Funding is not only about funding — you want to tell stories to your stakeholders. If you want to be seen as a digital company, you may look to join digital platforms. If you want to be a sustainable com-pany, you try to do something green. That is the main driver so far.

But this doesn’t come from the investor base, but from issuers. At the moment, green transactions do not get an increased investor base, so the pricing cannot be differ-ent. Therefore, why should companies that are not eager to tell stories create more cost to do a green issue, and at the end have the same result?

: Well, we are fortunate enough to have a green issuer here. Fabian, what’s the story?

Lander, VW Immo: I think there is a considerable need for green financing. In order to finance EU climate and energy policy alone, additional annual investments of around €170bn are required in the areas of maintenance, energy-efficient buildings, renewable energies, infrastruc-ture and much more. Green products are the perfect fit.

It’s right, in the Schuldschein market you don’t have significant green funds that directly invest and only invest in green Schuldscheine, but for some investors the green element is the trigger. This is my experience — some investors were attracted to our transaction because of the green nature of the loan.

Why do we go green? Sure, it’s the story — quite simply we plan and develop green assets and operate them in a green way, and green financing is like the last piece of the puzzle. That’s why we have an ESG rating, to show we think green, that our corporate DNA is green — otherwise we would just go to the VW treasury and say we need money!

: Michael, you have a very long experience in the market — will there be green port-folios? And will there be a pricing distinction?

Lamla, ABC: Certainly, there are green portfolios, and there will be more. Will there be a pricing distinction? I’m not sure. Regardless of the portfolio, banks have funding costs, risk and administrative costs, which you can’t ignore. But there are also other aspects beside green financing. Our branch is, for example, involved in social projects such as education.

Öhlinger, RBI: Silas, you pointed out it’s just a trickle of issuance so far — but there is definitely demand from issuers. They’re not just interested in green, but ESG financing. The topic is clearly becoming more prominent — every issuer wants to know what it’s about and how it works. There’s a lot of interest, regardless of whether it’s just marketing or if there is also a pricing benefit. Also, we see a lot of initiatives at the EU level, so though I fully agree that there is no pricing benefit at the moment, this might change in the medium term, e.g via tax benefits — or, to put it the other way, there would be a pricing disadvantage for non-green issues.

Distler, Helaba: I believe we will not see pricing dif-ferentiation, because we are already at such a low level. How do you differentiate 2bp or 3bp? It doesn’t really play well, especially when we usually work in steps of

5bp in the Schuldschein market. Looking at the investor base, bank lenders do not usually have green pockets — but banks are looking for sustainable financing, so perhaps they’d prefer to lend to a company that has sus-tainable goals.

Lamla, ABC: Also, we have to keep in mind, that not every issue can be green. We have many industries com-ing to the Schuldschein market which are simply not green, like pharmaceutical, telecommunications or engi-neering.

Lander, VW Immo: But that’s not the point. Of

course you can finance green companies with green Schuldscheine, but if they are already green that won’t make much of a difference. The real ambition should be toward financing brown companies, if they reach certain ESG goals. We have to bear in mind that roughly 70% of worldwide CO2 emissions come from around 100 com-panies.

Nittler, CCB: It’s great that we’re having this conversa-tion now. On a global level, discussions about green financing are open. Even if there are just questions, that’s great. I am from Luxembourg, the home of green bonds. The government of prime minister Xavier Bettel wants to further develop green finance, which will be a key focus of the Luxembourgish finance industry. But these dis-cussions are going on on a corporate and political level across Europe.

DIGITALISATION: Another theme that has been

brewing in the Schuldschein market is digitalisation. We have one of the co-founders of a leading platform here. Sebastian, what drew you to the Schuldschein market? Why this old-fashioned German loan market?

Sebastian Glock, VC Trade: Well, we started in 2016. Me and my co-founders, who have banking back-grounds, sat together and thought about the product. It is a manual process, filled with people doing manual things, with a lot of information and communica-tion needed. There’s a large workload and a lot of

Fabian Lander Volkswagen Immobilien



12 Private debt

costs, and fees are not increasing. We thought there must be a gap here.

Also, from a regulatory perspective, it’s a loan so it’s rather easy to handle. Our first transaction was actually a green transaction, with Verbund, and we also had one with VW Immobilien recently.

In answer to a previous question, we don’t exclude particular industries, sectors or issuers from our plat-form, but we rely on the quality assessment of the arranging banks and will introduce a preference option where investors can say they’re only interested in, say, pharmaceutical and automotive issuers. We’re aiming to make life easier for all participants.

We just heard from Laurent that the process of invest-ment is lengthy, as credit work is tricky, and we agree, which is why we have teamed up with Scope Ratings. If an issuer wants a rating to attract investors, this is avail-able via VC Trade.

: As Sebastian says, VW Immobilien did a transaction via VC Trade. How did you find it, Fabian?

Lander, VW Immo: It’s very topical, digitalisation. I’m very comfortable with it, as it’s gives you much more transparency. Just using Debtdomain, for example, you need to ask the arranging banks for the order book. Whereas with VC Trade, you see it live on the platform, the current order book, and any question raised by investors — and you can answer directly if you so wish. However, in my experience, if you give investors the chance to choose between the new way and the old way, they’ll choose the old way.

: We have two investors here. I’d be interested to know how many digital platforms have approached you?

Lamla, ABC: We have been approached by six or seven, and we are working on three. But the digital platform is not the decisive factor. The key point will always be the issuer, the company and can we be of benefit. If this fits then we’ll invest, through whatever IT system.

Nittler, CCB: We’ve been approached to sign up for dif-ferent digital platforms by the arrangers. We have good relationships with them and want to continue our good collaboration. There are transactions just sold on one

platform, which will force investors to sign up for mul-tiple platforms.

We are open to those new trends and we also think there will be more and more transactions marketed on a single digital platform. It is difficult to predict the future, but digitalisation is also a major topic in our industry. We are ready for it!

: UniCredit, as far as I know, is watching the digital developments from the sideline so far. What’s your perspective?

Mannl, UniCredit: Let’s wait and see — we are observ-ing the progress of digital platforms. A lot of issuers are asking about them, obviously. There is no doubt digitalisation is a necessity for banks, but from an issuer and investor perspective, as long as we have several plat-forms I don’t see much value being added to the market.

This is especially true in a challenging market, where marketing is much harder and an arranger’s role is more important. We are a good distance from borrowers being able to do their own thing in the market, far away from that. We, as a bank, have looked at every single platform to understand the phenomenon further — we’re keeping a close eye on progress.

Glock, VC Trade: We at VC Trade are very clearly in favour of having arrangers in the game, and we’re maybe the only platform like that, that’s also independent.

I don’t see any benefit in arranging banks becoming excluded. Banks add so much value to the process, when it comes to structuring deals, advice on tranches and market timings, and the first line of defence if a deal gets into difficulty.

We speak to many CFOs, and none of them say they want people on their teams spending all their time answering investors’ questions. Also, arranging banks underwrite transactions to give the deal added security.

We have never pretended to be a better bank or adviser than banks or advisers — we are an infrastruc-ture provider for digital issuance, providing transparency for the issuers, heavy efficiency gains for the arranging banks, and a streamlined process for investors, as well as providing access to ratings where wanted.

Clearly investors invest in an issuer, and whether they do that via a digital platform is not the most decisive question. But it makes the process quicker and safer, and reduces some of the marketing time.

Öhlinger, RBI: Transparency is really important, don’t get me wrong, but it’s something you have to explain, clearly. Let’s say we did a transaction in 2015 or 2016, when the market was in completely risk-on mode, and now the issuer is doing a transaction, when it is slower and harder to gauge — someone has to be there to explain that the borrower shouldn’t be afraid. It’s not like autonomous driving — that can’t be the final stage, because the transactions are too difficult.

Glock, VC Trade: I fully agree, that’s why we need arrangers. If there is something difficult in the market, arrangers are there to help and explain. Other platforms eliminate the arranger in their vision, we don’t. It’s very common to have in new technologies an over-disruption.

Sebastian Glock, VC Trade



Private debt 13

Lamla, ABC: I think digital platforms can allow for autonomous driving. A prerequisite is that everyone has a limit and a credit view, so that no further explanation is necessary. With ABC, we’re looking at specific situa-tions and structures, problem solving and sometimes go against the mainstream. For example, we enlarged our

automotive portfolio at the end of last year. This is where you need more contact, more exchange and dialogue with the issuer, while platforms become secondary.

Öhlinger, RBI: I fully agree. Platforms are a facilitator, and I don’t see a threat that arrangers will be replaced. Of course, there may happen to be one or two cases where an issuer is very sophisticated and can do the entire process.

The only problem is that it’s another drive that puts pressure on fees. If the issuer believes that the platform makes arrangers’ lives so much easier, then he may think we should do transactions at half the price — and that, to be honest, is not what the platform does.

It makes the process easier and streamlines it, but the majority of our services are elsewhere — structuring, advising and negotiating the documentation, and also having dialogue with investors.

Glock, VC Trade: In none of our slides will you ever find us saying we’re looking to reduce arrangers’ fees — we are not committing suicide. What we do say is that our platform can make smaller issuances possible. If you can do smaller issuances more often because a standard-ized process is cheaper it will save liquidity costs for the borrower — arrangers’ fees are not the largest costs, it’s liquidity costs that are key.

Distler, Helaba: Also, we have already gone through fee compression. I was asked earlier why we are playing with VC Trade, and I think as we’ve done most of the transactions on it, we are clearly the ones pushing it.

The answer’s very easy — now, after a year, we’re in a situation where we can book trades directly into our sys-tems, we’ve plugged our systems into theirs so we don’t have our sales teams booking all night long.

If you have a Lufthansa transaction with 150 investors, that takes time, and this time is clearly eliminated. Also, communication on the platform is more efficient. Back then, every arranger put every order into the order book,

then you have to sort it out — just inefficiency all over the place.

Mannl, UniCredit: Competitors are creating their own data platforms, and everyone is trying to get the first transaction done. So then, you will see fee discussions back in the market. If there’s a pitch competition and oth-ers are trying to win, it will always become about fees.

: My understanding is that fee compres-sion came before digital platforms?

Mannl, UniCredit: There is no end point. If you have more banks just wanting to market their own platforms, you’ll get a fee discussion.

: Klaus, if you look at the proliferation of platforms, will there be consolidation? What will the outcome be?

Distler, Helaba: It’s like reading a crystal ball, which is difficult. We clearly decided to use VC Trade because it’s a marketplace. There are now nine banks on it, and it offers a good number of transaction for investors — this is the key.

Why should a bank’s proprietary platform survive? There may be one or two platforms in the market, which may help competition, but we don’t need the number we have right now. With VC Trade, you have more than 400 investors signed up, which is basically all the main investors. With Lufthansa we had an order book of €1.3bn.

: Lufthansa was sold only via VC Trade, which was an effective way of getting investors to sign up. Will you use that strategy again?

Glock, VC Trade: It’s true that if people have a choice, they will stick to their old habits. We don’t expect to change the market overnight. Exclusivity clearly drives people on to the platform — for example, roughly 100 investors signed up because of Lufthansa.

We believe in the open market model, because if you have nine arrangers, and perhaps more to come shortly, it means many deals are multi-arranger deals, and then the arrangers get all those efficiency gains previously discussed. On proprietary systems, you can’t really have

Irene Öhlinger Raiffeisen Bank International

Klaus Distler Helaba



14 Private debt

multi-arranger deals. We would like to see as many investors and arrangers in the market on VC Trade as possible, and we try to create a system where efficiencies are gained for all in the market. But we expect more than one platform to survive.

: Of course, with fragmentation another option would be to merge with another platform?

Glock, VC Trade: We need consolidation, clearly, but whatever this ends up with will take a bit of time to figure out. We have the biggest investor and arranger base, but I think we’ll have a clearer picture by the end of the year.

Mergers, to your question, why not? It’s not on our topic list right now, but whatever benefits the market to be truly functional, is what we’re aiming for. Investors don’t want to onboard on four or five platforms, that’s the opposite of functionality.

: Interesting. So you’re not averse to the prospect of merging.

Glock, VC Trade: Why take anything off the table?

: We haven’t talked about regulation. As digital platforms rise, the popularity of the market grows, and there is an increase in secondary market activity, will regulators like Bafin and Esma look at the market more, and is that necessarily a bad thing?

Distler, Helaba: I think the European Commission is interested in a functioning private debt market in Europe, and clearly the Schuldschein market has devel-oped into an efficient and acceptable example, with €25bn-€30bn of issuance yearly. With the Schuldschein, unlike other initiatives, one clear goal of the EC has been achieved.

The platforms haven’t changed the market, so I don’t see why regulators will look into it. The platforms are facilitators, and the investors remain buy-and-hold. There won’t be more secondary market activity because the investors’ characters won’t change — I’m not afraid at all that regulators will look.

Lamla, ABC: I fully agree. We buy bonds to manage our liquidity, but Schuldscheine and bilaterals are there to provide a service to a client, which means long term commitment.

Öhlinger, RBI: What Klaus points out is very important. The regulator looks at all types of markets, and has a good reason to do so. Though there are more issuers, investors and arrangers, the Schuldschein market, the instrument and the legal requirements haven’t changed.

The regulator’s focus should always be on how to ensure a functioning market, and not how to impose fur-ther regulation on a functioning market.

SECONDARY MARKETS: Do you think if secondary market

activity were to increase, which I admit is once again crystal ball gazing, that would provoke some form of regulation?

Distler, Helaba: Why should the regulators look? If they wanted to look, they should have looked 10 years ago. There’s not more activity in secondaries than there has been in the last 10 years. Also, in the loan market there is a lot of secondary activity, and their market is far larger — so why should the regulator just look at Schuldscheine? Occasionally, when an investor has stopped liking the industry or the credit risk, he may decide to get out — but these instances are very limited.

Lamla, ABC: Eighty percent of the secondary offers we see are on a silent basis. Investors approach us because we have a reliable pre-screening with a quick decision process. Thus they don’t have to broadcast their sale.

Mannl, UniCredit: Hamburg and Hanover stock exchanges tried to invent a secondary market, but the transferability is quite limited — we’re talking eligible third parties, which more or less defines the scope of the market.

There are a lot of reasons why these attempts did not work. As you mentioned, transferring is within the documentation. If bank A is contacting you because for whatever reason they want to pass on the loan, that isn’t necessarily secondary market activity. We have to be careful when we talk about secondary market activ-ity, or secondary market trading, because this is just a transfer from one party to another.

Glock, VC Trade: We saw that attempt in Hanover and Hamburg. A Schuldschein is a loan is a loan is a loan. We are not building a secondary market because there is no need for it. When we hear some competitors talking about that, we strongly advise against it.

Mannl, UniCredit: I can remember 12 or 13 years back, when we had our first transaction. We dealt with, and still deal with, family-owned companies, and if we told them there was a secondary market they would rather shy away from issuing a Schuldschein. We spend a lot of time creating and defining black lists, where a borrower doesn’t want certain investors to be contacted.

Lander, VW Immo: From a totally different perspec-tive on regulation, and about buy-and-hold and buy-and-manage, I hope the regulators would look into privileging green private debt instruments, so the

Michael Lamla Agricultural Bank of China Frankfurt branch



Private debt 15

capital requirements would become lower compared with standard Schuldscheine — that would push green Schuldscheine and it would become an instrument to fund green investment. This is what the regulator should focus on.

Mannl, UniCredit: If you look at all the discussion sur-rounding climate change, this is a logical next step.

Lander, VW Immo: Five years ago there was a green premium, now it’s on par, in five years it will be inside.

: As the Schuldschein market becomes more international, why does it remain relatively sheltered from global economic events? Why does this private debt product remain fairly isolated? Does anyone have a brilliant answer? Mannl, UniCredit: There is no brilliant answer. However, let me add some colour through an experience with an Italian issuer — they issued a bond in early 2018 and three or four months later they did a Schuldschein.

Within those three or four months there were a lot of local problems with the Italian government, and second-ary market volatility was largely down to that. When you have a market where investors mark to market, macro events are in the accounts.

When you have a market where investors don’t mark to market, you don’t have to put macro events in your calculations. That is the reason for many international companies tapping Schuldscheine.

Lamla, ABC: The Schuldschein is a commitment to the client. Bonds, you buy for liquidity purposes — you have external ratings and daily pricing, which makes them easy to sell. With the Schuldschein, the main part is to be a bank with a client relationship, where you support the client and are there for the long term.

Nittler, CCB: We have a small portfolio of bonds, but with the Schuldschein it’s a long term commitment.

Öhlinger, RBI: Buy-and-hold investors look at the underlying credit — whether Mr Trump tweeted some-thing last night doesn’t impact that credit over five, six or seven years. Nittler, CCB: Credit analysis will not be that different. We have confidence in our pre-screening. When we go to our credit committees we go because we believe in the business model, and that even if there’s some negative announcement it will not impact our credit conclusions.

We strongly believe in the advantages of a borrower we lend to in the Schuldschein market, and believe that the risk will be well mitigated.

: But interestingly, you don’t get illiquidity premiums in the Schuldschein market for the longer term commitment.

Öhlinger, RBI: With unrated bonds you have funds that ask for illiquidity premiums, because they would have a problem sitting on something they can’t manage as they could manage a rated benchmark transaction. A bank as an investor will not manage its portfolio in such

a way. It doesn’t have to mark to market, that’s why it won’t change.

OUTLOOK: The second quarter this year has been

very busy — do you think this momentum will continue in the third and fourth quarters?

Distler, Helaba: I’m optimistic for 2019. We had a slow start but now we’ve sped up, and the volumes are signifi-cant so far. There are more M&A transactions to come, which brings volume and new issuers too. I believe we will see a sufficiently well balanced market over this

year. In March and April there were almost too many, and as we heard earlier, that’s sometimes difficult to handle on the investor side. We should reach at least the same issuance as in 2018, if not more.

Öhlinger, RBI: We see a very healthy level of activity, a lot of demand from issuers — that’s true especially when bond markets are volatile. I’d expect about the same level as last year — demand from the investor side remains healthy.

Mannl, UniCredit: We have a steady state at €25bn and then it’s up to whether or not the market can attract €1bn-plus deals.

Last year we had just one €1bn transaction. If there are Dax companies looking to raise, then we can reach €28bn, which was the 2018 all time record.

There have been order books over €1bn this year, but for whatever reasons those companies didn’t decide to raise that much. There may be more coming to the market, though. Another thing is that this year we might perhaps have more transactions outside Germany than from within Germany.

Nittler, CCB: It’s all down to the French issuers. A lot of those borrowers have the Schuldschein on the table, and they are just waiting for the right moment to launch.

Mannl, UniCredit: You started by saying Frankfurt was the centre of the Schuldschein. Perhaps next year, you will be saying that in Paris. You never know. s

Silas Brown GlobalCapital



INTERNATIONAL SCHULDSCHEIN MARKET INTERNATIONAL SCHULDSCHEIN MARKET

AT EUROMONEY’S Schuldschein conference in March this year, lend-ers from as far afield as Asia, Canada and South America were in attend-ance, asking questions and display-ing an energetic curiosity about the instrument.

Over the course of the past five years, non-European lenders have flocked to the Schuldschein market, on the hunt for implied investment grade borrowers at attractive rates.

But non-European borrowers have been slower to join in.

Of course, there are a few notable exotic exceptions. Etihad Airways became the first Middle Eastern com-pany to raise Schuldscheine in late 2016, issuing €209m in euros and dollars. The International Invest-ment Bank, the multilateral develop-ment agency headquartered in Mos-cow, launched a €30m Schuldschein in March 2017, while Israel Chemi-cals and Brazil’s Petrobras have also issued. And over the last two years a few US names have entered the market.

But arrangers are confident of fur-ther expansion, in particular after higher issuance from non-German borrowers last year and an encour-agingly high number in the first two quarters of this year.

“The main advantage of the Schuldschein instrument for non-European borrowers is that, in prin-

ciple, every corporate, financial institution and SSA is able to issue a Schuldschein,” says Rudolf Bayer, head of UniCredit’s medium term note and private placement syndicate desk in Munich. “According to our internal estimates, around half the volume of Schuldscheine placed this year has been from non-German bor-rowers — we think we will see more issuers outside the traditional Ger-man-speaking regions.”

One arranger in Frankfurt, asked what had held back non-European firms from tapping the market, says: “I think it’s often about the visibil-ity of the product — a lot of issuers don’t know much about it, so our job is to explain the instrument and its advantages. What really helps those discussions is examples of very suc-cessful international trades, to show prospective entrants.”

One of these successful transac-tions occurred in March when Reli-ance Industries, the conglomerate headquartered in Mumbai, via KfW Ipex-Bank and LBBW launched a

€150m debut deal across three, five, seven and 10 years. This was seen by many as a test for the market, and some weren’t sure how the adcredit would play with the notoriously prudent inves-tor base.

On the day that Reliance launched, one arranger from a rival bank said: “This deal is like a fishing expedition: you put your bait out and see if anything bites. But I’m not sure that they will with this one.”

However, many investors did bite. During an extended marketing

period, the lead arrangers sent emails to investors saying that demand had “considerably exceeded” the initial target of €150m, and market sources said order books had closed in May with over €400m of firm orders.

The success of this transaction is

no small feat, and many think this will spur other Asian borrowers look-ing for euro debt to consider the Schuldschein market.

“Reliance is a very important threshold for the market to reach,” says Morris Gutermann, director of corporate origination at Helaba. “Finally we have a larger, very well known company outside the tradi-tional first world areas in Europe and the US entering the market for a large amount.”

Alongside Reliance, Tianjin Rail-way Transit Group also raised €200m of 10 year Schuldschein notes in May, which was the first transaction from a Chinese issuer.

One investor who participated in Reliance’s deal says: “What this shows is that there are Schuldschein investors out there with a taste for regions that haven’t yet come to the market. It’s India now, but it could be China, or Hong Kong, or Malaysia later, who knows?”

Obstacles to growthHowever, to curb this investor’s enthusiasm somewhat, a few obsta-cles to world domination remain. Firstly, most companies in Asia are not like Reliance, which is rated Baa2 and BBB+ and by Moody’s and Stand-ard & Poor’s, is listed on the Mumbai and National stock exchanges and has a market capitalisation of around $120bn.

“The Schuldschein should not be made to fit potential issuers, poten-tial issuers should fit the profile of the Schuldschein market,” says Hela-ba’s Gutermann. “An external rat-ing is of great use, of course. Schuld-schein investors are of a conservative bent, they want issuers they know about whose businesses they under-stand. They want a blue chip with the security of a large size and a high turnover — it can’t be a fly-by-night operation.”

Flushed with years of popularity in Germany and its neighbouring countries, Schuldschein arrangers have begun to look across the globe for new borrowers to tempt to the market. This year has brought the first transaction from India, and many say Reliance Industries’ success may spur more non-European entities to target the Schuldschein investors. Silas Brown reports.

New frontiers: the Schuldschein ventures beyond home borders

“The Schuldschein should not be

made to fit potential issuers, potential issuers should fit the Schuldschein

market””

Morris Gutermann, Helaba

016_PD_the international schuld.indd 16 11/06/2019 18:29


INTERNATIONAL SCHULDSCHEIN MARKET INTERNATIONAL SCHULDSCHEIN MARKET

Schuldschein lenders therefore may not be as excited by smaller Asian firms, with no external ratings.

There is some evidence for this. Swiss textile firm Saurer, which was bought by the Chinese Jinsheng Group in 2012, held roadshows with Schuldschein lenders in 2017 for a prospective issue. But, according to several market sources, there was not enough interest from investors, so the deal was put on hold indefinitely.

This may be a useful warning for Schuldschein agents.

“You won’t be considered a seri-ous arranger if you think you can place any non-European borrower in the Schuldschein market easily,” says Louai Al-Jaafari, director at Raif-feisen Bank International in Vienna. “You have to think of which inves-tors to target, approach them for soft-sounding, and see if they’re inter-ested.”

Chinese banks have European branches which invest in Schuld-scheine, for example, and branches in Africa and Asia and elsewhere that lend in those regions — so they may house their lending relationships with some international borrowers elsewhere.

Subsidiary sidestepsThere is a further issue to address. The Reliance deal was one of the few transactions to have been issued not only by a non-European company, but via a non-European corporate entity. It is not clear how many inves-

tors can buy such deals. “Many investors in Schuldscheine

are only mandated to invest in Euro-pean entities, which has historical-ly prevented borrowers outside the EU from selling Schuldschein notes,” says an investor.

US companies have sidestepped this hurdle over the past few years by

borrowing via Europe-an subsidiaries — which could be the answer for other regions.

Sherwin-Williams, the US paints com-pany, closed its debut Schuldschein for €240m in September last year through its Luxembourg subsidiary. And Wabco Europe, an industrial equipment supplier with headquarters in Brus-sels, launched a €200m debut Schuldschein in February 2018. It was guaranteed by Wabco Holdings, list-ed in New York.

“This is a good way of keeping the Schuldschein investors on board, while expanding globally,” says an arranger at a German bank. “I don’t see a reason why this would just be for US issuers, and other non-Euro-pean borrowers should take note.”

The reverse can also happen, where European borrowers issue non-euro debt via non-European entities.

Fresenius US Finance II, a US enti-ty of the German medical services company Fresenius SE, raised $400m in March 2016, with a Schuldschein led by Helaba and HSBC. Before that, Arcadis issued $127m through a US subsidiary.

“Borrowers from the US were all the rage for the past few years, and they helped the idea of issuing via European subsidiaries form. But after

US President Trump’s tax changes and cash repatriation, many of those prospective corporates have gone quiet, as their funding needs have fallen,” says an arranger in Frankfurt. “So instead, our focus has turned to other parts of the world, and other parts of Europe.”

Heading southSome arrangers think those coo-ing over non-European borrow-ers are missing a pocket of growth right under their noses.

“With Italy and Spain, you have a much wider investor group in the Schuldschein market that’s prepared to consider lending,” says an arrang-er at a German bank. “While other arrangers run around the world try-ing to find exotic borrowers, we’re just going to get on a train and head south.”

The Schuldschein market has had few transactions from Italy and Spain — surprising, given their proximity and the number of implied invest-ment grade borrowers located there.

“I think in 2014 and 2015, when the Schuldschein was growing inter-nationally, Europe was really still recovering from the crisis, and many investors hesitated with Italy and Spain,” says Al-Jaafari. “But Spain has recovered and there are plenty of international and domestic corpo-rates there, while Italy’s solid corpo-rates have remained strong.”

Issuers from those regions are beginning to creep into the market.

From Italy, standout transac-tions last year came from Pirelli and Buzzi Unicem, while Spanish infra-structure and renewable energy company Acciona returned to the Schuldschein market in May with a €150m-minimum triple tranche transaction.

However, there is still a catch.Al-Jaafari notes that the biggest

problem comes from relationship banks. “Italian banks are still quite competitive lending to their cor-porates, so they may have to pay a pick-up of 50bp-60bp to enter the Schuldschein market for the first time.”

This is not always the case, though. For Pirelli’s Schuldschein, the mar-gin ranges were 105bp-115bp, 125bp-140bp and 150bp-165bp for three, five and seven years. Even at the wide ends of the ranges, these spreads are tighter than the loans Pirelli placed in the syndicated market a few years before.

“Expect many, many more issuers from Italy and Spain to come soon,” says one forthright arranger. s

“Spain has recovered and there are plenty

of international corporates there, while Italy’s solid

corporates remain strong”

Louai Al-Jaafari, Raiffeisen Bank

International

40 % of all SSD tranches* from outside Germany

Issuance by country of origin in Q1 2019 (distribution by number of issues)

SSDs broken down by currency tranches

Germany 12 57.1% Belgium 2

9.5%

France 2 9.5%

Austria 2 9.5%

Switzerland 2 9.5%

Luxemburg 1 4.8%

Non-German Schuldscheine nearly half the market

Source: Helaba research

016_PD_the international schuld.indd 17 11/06/2019 18:29

18 Private debt

The Vienna Private Debt Roundtable

AUSTRIA AND THE CEE

: As we’re in Vienna, perhaps we should begin here — what, in your experience, attracts borrowers from Austria and central and eastern Europe to the market?

Louai Al-Jaafari, Raiffeisen Bank International: It’s easy to say that language itself is the most attractive aspect. Before 2012, the Austrian borrowers used to issue Schuldscheine via an SPV outside the country, because that meant a change in the stamp duty.

But that changed at the end of 2011, and all of a sud-

den Austrian blue chips found this funding instrument. Since then, Austria has become the second ranking country of origin for issuers, after Germany itself.

These borrowers, from Austria and central and east-ern Europe, are the blue chips of each country. In 2013 we did the Ministry of Finance of Bulgaria, and we closed the third Czech corporate transaction of the year last week.

Lenders are looking to diversify their investments away from Germany, so you find a receptive audience.

: Felix, you’ve issued repeatedly in the Schuldschein market. Why have you found such a home there?

Participants in the roundtable were:Louai Al-Jaafari, director, Raiffeisen Bank International

Morris Gutermann, director, primary markets, Helaba

Maximilian Hagendorff, associate director, debt capital markets origination, UniCredit

Dávid Lustyik, team leader, corporate banking division, KDB Bank Europe

Stefan Ondra, deputy head, group treasury, Porr

Dominic Walch, head of group treasury, Fritz Egger

Felix Warmuth, group treasurer, RHI Magnesita

Silas Brown, loans and private debt editor, GlobalCapital (moderator)

Schuldschein expands eastward in a digital age

The Schuldschein market is widening its circle of issuers and investors. It is now a natural choice for Austrian companies wanting to complement bank funding, but not necessarily big enough to issue public bonds.

Vienna is also often the interface between the Schuldschein market and central and eastern Europe. Investors are interested in CEE, because of its economic growth, and dealflow is accelerating. The market reaches further still — Reliance Industries has brought the first deal from India. For some investors, the need for an implied investment grade rating is a barrier — but the growing diversity of the Schuldschein investor base is helping. Occasionally deals are done entirely without German investors.

The Schuldschein’s bilateral legal structure remains, for now, an unalterable feature that participants must live with. But changes are happening in administration, with rival digital platforms looking to speed things up. GlobalCapital gathered issuers, investment banks and investors to discuss the perspective on private debt from Vienna.

018_Private debt Vienna RT_s.indd 18 11/06/2019 18:31


Private debt 19

Felix Warmuth, RHI Magnesita: The main benefit is diversity in one’s funding portfolio, in addition to fund-ing through the banking markets and public markets. As Louai rightly mentioned, the fact that a lot of Austrian borrowers have ties to Germany also plays a big role. A large number of Austrian corporates have exports to, as well as production in, Germany, among other things, which gives them a natural tie to Germany, and there-fore also to the German investor base.

Dominic Walch, Fritz Egger: We generally use the cap-ital markets to diversify our investor base. Until 2012 we were heavily using the Austrian retail bond market, but that isn’t there anymore, at least in the format it was in in the past.

The Schuldschein gives us a lot of flexibility in struc-tures, fixed or floating, in maturity and volume, as well as investor diversification.

But also, in the current environment, the Schuldschein is an economically attractive instrument compared with other ways of raising debt, especially for us as an unrated corporate. We certainly wouldn’t tap the Schuldschein market as much if it wasn’t so eco-nomically attractive for us — we would focus on other instruments.

Stefan Ondra, Porr: For us, its main advantage is its flexibility in tranches and volume. Typical Austrian cor-porates are not looking for €1bn at once, they are look-ing for small placements.

Warmuth, RHI Magnesita: The market also gives you flexibility on tenor, importantly — you can choose three, five, seven, eight, or even 10 years.

Walch, Fritz Egger: And it gives you the flexibility to redeem earlier if you so wish.

: From the investor side, Dávid, are you comfortable in participating in all tranches? Why are you interested in what the market has to offer?

Dávid Lustyik, KDB Bank: We are a conservative bank and we prefer shorter tenors, mostly three years, but issuers don’t want that at the moment.

We choose floating tranches only, as we don’t want to deal with any hedging. The big advantage for us in the Schuldschein market is that, as a small investor, we can lend only €5m or €10m. In a syndicated loan that is not really possible. The Schuldschein market therefore allows our size to be aligned with our ticket sizes.

Al-Jaafari, RBI: Usually the revolving credit facility in the loan market is the entry ticket for any lender seeking a relationship with a corporate, but in the Schuldschein market the vast majority of Schuldschein investors are not seeking a relationship. It’s convenient for a borrower not to have to deal with lenders looking for more ancillary business. Of course there are some lenders that think a Schuldschein investment is an entry ticket.

: When you speak to Schuldschein investors do you hear them speak in those terms, regarding relationships?

Maximilian Hagendorff, UniCredit: Absolutely, from time to time, especially the commercial banks, which ask for bilateral calls with the issuers, and want to show their expertise in certain fields. But I think most issuers are sensitive to opening up new relationships, and will only do so if it makes sense.

Morris Gutermann, Helaba: Let me echo what Maximilian said. It’s part of our job as arrangers to manage the Schuldschein transaction in such a way as to strike a proper balance between the issuer and the investor, and sometimes keeping the issuers away from the investors. We sometimes have to be clear with investors that they are participating in the Schuldschein only in the terms as stated. But other times, we need to facilitate bilateral conversations between the two, especially for investors with the bigger tickets. It’s about striking the balance.

: Back to the central, initial question. Beyond the German-speaking region, the key sources of growth for the market so far have been the Nordic countries and the French-speaking region. Do you think central and eastern Europe will be an important source of growth in future? What are the main impediments to growth?

Gutermann, Helaba: Those are very important ques-tions. With the Nordics, that was ground zero for the international Schuldschein. Before 2005 or 2006 there was no international Schuldschein to speak of, apart from the odd Austrian or Swiss borrower. But we for-ayed into Norway and Finland back then, and found a very receptive audience. When you offered those bor-rowers diversification, with a product that fits medium term needs with competitive pricing, it was like push-ing at an open door. Central and eastern Europe is up and coming in the market, especially Poland, the Czech Republic and Hungary. But the main impediment to fur-ther growth is that the Schuldschein remains a conser-vative market. The investors are somewhat provincially minded, and we need to move at their pace.

Al-Jaafari, RBI: It is true that German investors are the base investors. However, new international investors are participating too. Without them, you wouldn’t see such oversubscribed transactions. I’m speaking mostly

Dominic Walch Fritz Egger



20 Private debt

about Asian investors, who should always be in mind for transactions that reach €300m and above. For vol-ume, you need the Bank of China, ICBC etc. They can provide the necessary commitments for a benchmark facility. When they say they are coming, they are com-ing.

Hagendorff, UniCredit: I’d follow on from that. The more international the issuer, the more international the investors. The base investors are still from Germany but if an international borrower requires size, it will come from international investors. Looking at it the other way, what prohibits more and more international issu-ers from entering the market? An implied investment grade is certainly a positive precondition.

Al-Jaafari, RBI: We have closed three transactions from the Czech Republic: CPI Property, jointly with UniCredit; O2 Czech and EP Infrastructure. Without the international investor base, the launch targets would not have been met.

: Dávid, do you have country limits pre-venting you from investing in certain transactions?

Lustyik, KDB Bank: At the baseline, we need an invest-ment grade rating. We can’t ignore the CEE region because of its strong economic performance. But in some countries in the CEE region we, as a Hungarian investor, for tax purposes are not welcome, namely Bulgaria, Poland and Romania.

Louai just mentioned three transactions — we took two and our partners in London took the other.

However, there may be some obstacles regarding taxation. Many countries impose withholding tax, and although they have double tax treaties, such treaties may not always reduce the withholding tax to zero.

: One of the more extraordinary transactions this year has been from the Indian conglomerate Reliance Industries. Some investors were concerned about withholding tax implications with that borrower.

Lustyik, KDB Bank: We would have been very happy to participate in that transaction, but our network already has a huge exposure to that credit, so we could not participate. We didn’t get to the withholding tax, but I’m not sure how ready the borrower would be to pay additional gross-up amounts.

ASIA AND SCHULDSCHEIN: Morris, Helaba has very close ties with

Asian investors — what are your thoughts on the prospects of growth in Asia?

Gutermann, Helaba: We have indeed been very active in Asia, on sales and syndications, acquiring investors in places we weren’t even aware they would be.

We cover all the banks in Taiwan, for example, which is an amazing thing if you think about it. We’ve done two tours throughout Asia, from Singapore right up to Tokyo, with basically everybody in the banking industry present and very receptive to the offering. In both cases

we had Lufthansa accompany us, and after the Asia trip they did over €1bn in the Schuldschein market.

On the borrower side, there are very strong names in Japan and China, and nothing prevents them from accessing the market, apart from their own funding needs and comfort with the product.

Al-Jaafari, RBI: When the Reliance transaction was launched, I thought about the German savings banks. They have certain principles about whether they can participate out of their region, out of their country, out of Europe etc. Nevertheless, for an Asian borrower, you would ask the savings banks but also Asian investors, who may already have heavy exposure to the credit in their country of origin.

Gutermann, Helaba: That’s a very interesting point. We try to manage the Schuldschein in a traditional way, with a healthy mix of local and international lenders. But sometimes, if the Sparkassen aren’t there yet, it is entirely possible to bypass the traditional lenders, and you can get an international borrower purely financed by international lenders. This is quite amazing in itself.

: It would be a curious thing to have an Asian borrower using a German product to sell to Asian investors. I suppose that could disrupt the diversification angle?

Gutermann, Helaba: Diversification should always be a strong selling point in the Schuldschein market. If an Asian issuer keeps seeing the same names pop up in every order book, that would be a problem. However, the one thing that mitigates this is that there are differ-ent buckets in different institutions.

Hagendorff, UniCredit: But an Asian borrower might well provoke a sort of reverse diversification. The Schuldschein attracts Asian and Middle Eastern inves-tors buying European credit. But if an Asian borrower taps the market, maybe the European commercial banks would be interested, in order to diversify their credit portfolios.

: In terms of UniCredit’s origination, in which regions do you see the most potential for growth?

Morris Gutermann Helaba



Private debt 21

Dávid Lustyik Helaba

Hagendorff, UniCredit: It’s really about the credit quality of the issuer as opposed to the country of origin. Why shouldn’t a US borrower fund via the Schuldschein market if there’s a structural advantage for it? I wouldn’t rule out issuers from CEE or Asia, but the product itself needs to be suitable for the company.

: Turning to issuers, I’m interested to know where the Schuldschein fits in your funding strategies. Stefan?

Ondra, Porr: We had a similar strategy to Egger until 2012 and 2013 — we tapped the Austrian retail bond market. But this time has gone, unfortunately.

Right now the Schuldschein is complementary to our usual sources of funding, but it is our main source of long term debt. And by way of example of what Morris was saying, our first Schuldschein, in 2015, was sold purely to Asian investors.

FITTING IN THE FINANCING TOOLBOX

: Is the Schuldschein destined to be a complementary instrument to other more mainstream forms of debt?

Walch, Fritz Egger: That’s how we see it, as a comple-ment, primarily to our core banking group, which pro-vides syndicated loans. For diversification away from that, the only viable and sensible option for us is the Schuldschein market.

We would consider Eurobonds in the future, but we are not there yet, in terms of size. We had a look at US private placements, and they may become more impor-tant, as we are currently in the construction phase of a plant in the United States.

Warmuth, RHI Magnesita: We had a look at US private placements too, but we decided not to because of the covenant structure. It does have an advantage when it comes to tenors, but it is way stricter on covenants. When deciding on a financing instrument you have to look at all pros and cons — also the Schuldschein mar-ket has its cons, like the fact that you could have 60 or 70 investors and you don’t have a majority clause in the Schuldschein documentation

: The bilateral nature of the Schuldschein is an essential part of the instrument, constituted under the German Civil Code. Morris, should that change, to allow for investors to have majority voting clauses?

Gutermann, Helaba: The bilateral nature of the loan is inherent in German law. When you hear a headline number, like a company has raised a €500m Schuldschein, that’s fictitious — in fact it breaks down into however many smaller bilateral loans with how-ever many investors.

This is the legal reality we find ourselves in. So what happens? It’s a give and take. The Schuldschein market should really only attract the investment grade corpo-rate world, there should be a self-selection going on.

As soon as you deviate from the investment grade world, you have to bring in factors like covenants, which detract from the marketable nature of the prod-uct.

Let me give you an anecdote from a client recently. They added an unusual covenant, a gearing covenant, which I remember from my student days as debt over equity. This is quite rare for the Schuldschein market, but we thought it wasn’t a problem when we handled their documentation, seeing as they had it in their RCF.

However, they then wanted to change it later to a standard leverage covenant, and those same investors, that weren’t even really aware of the gearing covenant, all of a sudden had a problem with the leverage cov-enant.

This is when you run into trouble dealing with 70 or 80 investors. The best course of action is to keep the issuer group at investment grade, a stable issuer profile which doesn’t require covenants.

Hagendorff, UniCredit: Back to your question regard-ing Nordic issuers, do they go for the Schuldschein just because of lean documentation? Obviously not. The instrument is beneficial to them in terms of flex-ibility in size and tenor, this is why they’re tapping the market.

: As an investor, Dávid, would you want more covenants?

Lustyik, KDB Bank: Personally I’m not covenant-mad, but I do prefer them. Because we are a conservative bank, the existence of covenants gives us a certain level of comfort that the borrower will not do anything mad during the life of the loan.

But though we are conservative, we are not trigger-happy. Our bank participated in the corporate restruc-turing during the Asian crisis, and we don’t want to destroy anybody because of a covenant breach. We just have to investigate how situations can be sorted out. But when covenant-lite structures came out in the Schuldschein market a few years ago, I was quite shocked.

Al-Jaafari, RBI: Since Landesbanks are always leading the major transactions, this gives the savings banks in Germany major comfort to participate. This may be



22 Private debt

why the covenant-lite structures started to pick up. When the economy was growing and competition was heavy between arrangers, promising light covenant packages became a way of winning mandates.

But the comparisons between the Schuldschein and US PP instruments really should emphasise one thing — the investors. Investors in the US are sophisticated, they need higher requirements to participate.

: What would investors in Austria like to see more of in the Schuldschein market?

Al-Jaafari, RBI: You are talking about 25 or 30 inves-tors in Austria. You could say that liquidity costs are higher in Austria, as there are fewer investors. Austrian blue chips can easily place a transaction with German investors — that’s why Austria is a fertile ground for German Landesbanks to play in.

The Austrian investors are price-sensitive and request a floor. A Schuldschein with tight pricing without a floor is very challenging for them. However, they’ll still try as much as possible to participate.

Walch, Fritz Egger: Besides spreads, in our experience all investors are now taking a closer look at documen-tation, to make sure there is nothing crazy in it. They basically take a closer look at the credit.

Hagendorff, UniCredit: What I find very interesting is that if you look at the order books of Austrian bor-rowers, their core relationship banks often participate. Despite challenging spread levels, the core banks still support these transactions.

Walch, Fritz Egger: Not for us because we try to keep limits open to other investors.

Warmuth, RHI Magnesita: Are Austrian investors par-ticipating in non-Austrian Schuldscheine?

Hagendorff, UniCredit: Selectively, yes.

Al-Jaafari, RBI: Some of them participate in French transactions, some in Swiss. With German issuers, they can always participate, though those transactions are getting very tight. We see some Austrian investors participating in the CEE trades too. Spread levels are

higher for these transactions, so that helps bring the Austrian investors in.

Ondra, Porr: If you look at the total quantity of inves-tors in Austria, as Louai said, I would assume that five or so would already have lending relationships with an Austrian borrower. Which leaves 20 with no relation-ship that could be interested in a Schuldschein issue.

DIGITAL FUTURE: Moving on to the new digital

platforms in the Schuldschein market, I know Helaba has worked closely with VC Trade, the leading one by number and volume of issues. But why is the Schuldschein market becoming a hotbed of technological progress?

Gutermann, Helaba: Thanks for this question. Because in all the business we do, with or without a platform, we rarely get a chance to think about the fundamentals of the market.

Obviously there’s technological progress, and banks either need to accept it, or get run over by it. We’re very happy at Helaba to have been there from the beginning with VC Trade, a fintech start-up we accom-panied from the beginning.

There are now eight or nine different platforms, and there will surely be a shake-out at some point. We’re confident we have the right recipe with VC Trade, which is an open platform to arrangers and investors.

This should become a market standard, obviously unless something unforeseen occurs. We have a con-trast with Debtvision, the platform from LBBW, which as far as I can understand is a little more proprietary. So when we are in a deal with our friends at LBBW, we agree to use both platforms as additional distribution channels, but at some point there has to be a decision on how that proceeds.

Fundamentally, though, the Schuldschein has been a manually handled product for centuries. It’s really a piece of paper you need to sign, and so we have a lot of different legal mark-ups and a lot of paper changing hands. It’s hard for me to keep track of everything, and I’m glad we have very capable lawyers that can.

But this way of life seems very wasteful and inef-ficient. So imagine if you were able to do all of this process in a virtual space, which everyone can work on in real time. This saves time and costly telephone calls and so on.

With the distribution itself, the more electronic the better. This will mean for an investor that you won’t need to accept a telephone call from a salesperson or be notified in some other way, or constantly read your emails, or even be in your office.

Instead, you will be immediately notified digitally of a new Schuldschein issue, and have immediate access.

The platforms are incremental improvements made possible by technological advancement. We embrace it because this is the way the market will be in the future, and we’d rather be on top of it and not have someone else handle this change and create something totally different.

: Louai, Raiffeisen’s in the privileged

Louai Al-Jaafari Raiffeisen Bank International



Private debt 23

position of having both worked on VC Trade and created its own platform, Yellowe. What’s your perspective on digital progress in the Schuldschein market?

Al-Jaafari, RBI: Let’s look at the syndication stages. There are effectively four: distribution, accessing the information package, committing to a transaction via a firm order, and then wrapping up the trade from a back office perspective.

Debtdomain, the existing digital software the market uses, provides the first two steps, distributing via a platform, and accessing the information package. This is already quite convenient, and all investors are already onboarded on to this platform.

We have an investor base of 500 to 600 in the Schuldschein market, and accessing these investors is done by email or telephone or via Debtdomain.

It is certainly a trend to be digital, and we need to avoid competitors from IT businesses finding solutions to our problems, and creating further competition for retail and corporate banking.

VC Trade has prompted many other platforms to fol-low: LBBW’s Debtvision, HSBC’s Synd-X and we have Yellowe. But in comparison with the others, RBI’s plat-form is dedicated to sole mandated transactions for us, and intends to provide a platform for our own group, the co-operative sector in Austria.

So we are not in competition with VC Trade and the like to onboard investors on to the platform. We want to provide the regional, smaller Raiffeisen banks with a platform where they can access vanilla loans and Schuldscheine, with facility sizes between €10m and €40m.

: Maximilian, as far as I’m aware UniCredit has not distributed via VC Trade yet, and also has not created its own digital platform. Where does your bank stand on digitalising the market?

Hagendorff, UniCredit: The larger European invest-ment banks aren’t simply looking at Schuldscheine, but potentially also focusing on bond markets.

UniCredit has been on transactions where VC Trade was used, but we aren’t part of it yet. We are observing both its progress and the progress of digital platforms in general.There is no doubt digitalisation is a necessity for banks, but from an issuer and investor perspective, as long as we have several platforms I don’t see much value being added to the market. Each bank running a platform needs to convince investors and issuers to use that ser-vice.

Platform businesses in a digital world usually end with one platform where the winner takes all. So in this respect, I think you need to have one market standard platform which is open to everyone and easily acces-sible.

: Debtdomain has been notably quiet about the digital platforms. It has the biggest reach of any of the platforms, and its head has intimated he may add functionality. Do you think Debtdomain is the one being threatened, or do you think it is the threat to the digital platforms?

Gutermann, Helaba: We’ll know later, I suppose. Right now I am observing, and Debtdomain is too. As Maximilian said, the ‘winner takes all’ should hap-pen, otherwise digitalisation is no use to anyone, and you would have to participate in as many platforms as there were banks. That would be similar to everybody at a movie theatre standing up instead of sitting down, to see better.

Debtdomain have a very good platform and are involved in every transaction in the Schuldschein mar-ket to some degree, so in this interim period they are doing the right thing and waiting it out, and seeing where it all ends.

: It is not breaking news to suggest investors are fed up with the sheer number of digital platforms. How many invitations have you had to onboard, Dávid, and how many have you accepted?

Lustyik, KDB Bank: We certainly use Debtdomain. When we receive invitations to participate in a Schuldschein transaction, we can opt to use Debtdomain, or another new platform. We have always stuck to Debtdomain.

It is definitely true that the Schuldschein ties up a lot of workforce, so if there can be an added value to sim-plify the process and reduce the requirement of human resources, we will try it.

Al-Jaafari, RBI: The stages of a Schuldschein transac-tion, committing digitally by pressing a button, and signing via a digital signature, that would be something many lenders would appreciate. Otherwise, all they are is fed up with having to sign up to another new platform.

Ondra, Porr: From the issuer’s perspective, too, if you can somehow get rid of, or shorten, the signing process, by replacing manual signatures with digital ones, that would be very helpful.

There are some platforms claiming to be able to get rid of the arrangers in a Schuldschein issue — let’s see how that goes. It could work for some issuers, that are regular and well known, and use standard documenta-tion. But definitely not for the less frequent borrowers.

Stefan Ondra Porr



24 Private debt

But looking at the timing of the whole transaction, the crucial part is due diligence, and that digital plat-forms cannot help with.

Walch, Fritz Egger: What we’d like to see is a faster process, a leaner process. Our last transaction was our first experience with digitalisation. I’m happy we did it, and we gained some insight, but I wouldn’t go so far as to say it was a totally digital transaction. We used digital help, but in one sense emails are also digi-tal.

It certainly makes sense to standardise the process,

but there’s a long way to go before digitalisation is really end to end — starting with the due diligence process, then the documentation, and also the Q&A with investors. However, digital platforms add a lot of transparency and insight into the process, which we wouldn’t have got in a classical way.

Ondra, Porr: Looking at our transaction, it was just a limited number of investors we approached, and digi-talisation would have made little difference as we only needed to send emails to 10 or 20 investors.

Al-Jaafari, RBI: I’m not a lawyer, and I don’t know the regulations in Austria totally, but I think it still needs to be clarified whether a digital signature would be acceptable by law in Austria. As long as this last step of the Schuldschein syndication is cleared up, there is still some way to go for the market to be fully digital.

Hagendorff, UniCredit: It is slightly more complicated than that. You have to have legal approval for not just one European country, but several. In short, there are civil law and regulatory hurdles to overcome. We will get there, but in the meantime we’ll continue to do things the traditional way.

Ondra, Porr: There is also still participants’ behaviour. At the moment I don’t see a clear benefit of just using a digital platform — you do not have the whole pro-cess, so just using it for one single step…

Al-Jaafari, RBI: Besides, not all the investors are onboarded, which is a problem…Hagendorff, UniCredit: Indeed, some investors might

not be open to signing up for a new platform. Of course, the bigger investors have the capabilities to have easy access, but I’m not sure with the smaller investors.

Al-Jaafari, RBI: Unless you are like Lufthansa, and only sell via the platform. But only Lufthansa can do that.

: For those who didn’t know, Lufthansa issued a Schuldschein recently that was available only on the digital platform VC Trade. It meant investors had to sign up to the platform. Do you think that was a masterstroke by VC Trade?

Al-Jaafari, RBI: Definitely, yes. Before Lufthansa’s issue, I asked VC Trade how many investors were onboarded on to their platform, and they said it was around 300. Immediately after Lufthansa launched, an additional 80 investors onboarded.

Gutermann, Helaba: With that trade, we were confi-dent we had the right number of investors and the right composition before the launch. We knew if we threw it out there, it would get done.

There’s a much shorter timeframe with these digital transactions — we’re not talking four-plus weeks, as is typical with the Schuldschein.

This exclusivity element is right now for the flagship names, but it’s a pretty obvious sell we have and we include it in our pitches, as part of our overall services. But this is not just about Helaba — we really must emphasise the openness of VC Trade as a platform. It allows any Schuldschein arranger to come on to it, as well as any issuer and any investor around the world. We have numerous examples since the dawn of the digital age, as Maximilian has already said, as to how different formats in the end gravitate towards one solu-tion. We think the best approach is to have an open platform, instead of a proprietary one.

: Maximilian, what criteria would UniCredit need before it jumped on to a digital plat-form?

Hagendorff, UniCredit: Digital platforms should defi-nitely benefit three parties: the issuer, the investor and, even if to a smaller extent, the arranger. There are still many different opinions on how to do that, and there-fore we are assessing each different solution to align the benefits for all parties.

MARKET OUTLOOK: The last round of questions should be

to do with the future. Last year the Schuldschein market didn’t grow in volume, but it was very healthy. From a borrower’s perspective, Felix, are you thinking of issuing any time soon, and is there a clear distinction between volume and the health of the market?

Warmuth, RHI Magnesita: We do consider it, of course. We constantly compare unrated bonds, bank financing, private placements and also Schuldschein pricing, and we tap the different markets as we go. Another option for us in the future would be rated

Maximilian Hagendorff UniCredit



Private debt 25

bonds, but there are steps to take before that can occur.

Al-Jaafari, RBI: One question we have circled around today is, why the Schuldschein market? I think because it’s resilient. We have seen in 2008, 2011 and 2015-16, when public bond markets are volatile, the Schuldschein remains stable in terms of spreads and capacity. In this market you have a reliable investor base which doesn’t

look for ancillary business — all they are interested in is lending to investment grade names.

Warmuth, RHI Magnesita: For sure, the Schuldschein market is a very stable and resilient market. If you com-pare the Schuldschein market with rated or unrated bond markets, there’s way more volatility in the public mar-kets, which you have seen especially in the last quarter of 2018 and also at the beginning of 2019. That’s defi-nitely a big advantage of the Schuldschein market and also makes it attractive for issuers.

Gutermann, Helaba: The untold story of the first quarter is we began the year with a lot of uncertainty about where the market was heading, in spreads and everything else. We entered the year on a very sour note, don’t forget — we had done a few transactions in November and December, but we had to overpay to get them done.

Coming into 2019 we didn’t know whether this would be the future. Is this going to be it? Are we off the low-est possible spreads? In the Schuldschein market we speak of this kind of invisible floor which we can’t break through, because it becomes uninteresting for the inves-tor.

Wherever that is, it’s around 40bp or 50bp for five years. We were off those levels at the end of last year, and we didn’t know whether there would be widening throughout the year.

But over the past few months, we are back to that invisible floor level — the end of last year was a storm in a teacup. But we were surprised by this, because at some point all this resilience and stability should give way to wider developments in capital markets, like the ECB cancellation of bond buying and so on. All of this should have influenced the market, but instead we’re just marching on — so, a little bit scary, but overall very positive.

: As the market internationalises, you’d think the Schuldschein market would be more impacted by global economic events. Is there any reason why that’s not the case?

Gutermann, Helaba: The thing is we don’t address Schuldschein offerings to your typical portfolio manag-ers, but to loan officers. They march to a different drum beat.

They don’t have an ear all the time on the news cycle, instead they are looking at refinancing costs and credit quality. The product to a certain extent reflects this — we don’t need hours to market a borrower, we need weeks. We’re happy with this because that provides a level of stability.

Warmuth, RHI Magnesita: It’s a more conservative investor base than the bond markets. The Schuldschein investor market is in a big part driven by the German Sparkassen, they are the biggest investors and they are conservative in nature.

: But also the market’s driven by larger commercial banks. Dávid, are the Asian investors here to stay?

Lustyik, KDB Bank: I don’t see any indication of Asian investors pulling back from the market. As I previously mentioned, Asian banks are largely not opportunistic, but rather pursue conservative investment strategies. As long as the borrowers that come to market have stable financial backgrounds, the appetite of Asian investors will remain stable.

Ondra, Porr: It has been a slightly different experience on our side, but maybe that’s because we’re in the con-struction sector.

You can see transactions now where Chinese banks are cautious around construction, partly because they have a huge problem in their country — and although five Taiwanese banks looked at our recent deal, they didn’t participate. I haven’t seen any Taiwanese banks in construction for a while.

Walch, Fritz Egger: We saw Asian investors in both our 2016 and 2019 transactions, however they were at least to some extent different investors. Some that were active in 2016 did not focus on the transaction in 2019. But in general, I believe Asian investors are here to stay.

Al-Jaafari, RBI: Asian investors are sensitive when it comes to industry. Automotive is now an industry they will not touch — whereas last year auto was in favour. But on another subject, what I would love to see in the next few years is more issuance from Italy and Spain.

There are so many blue chip corporates in those two countries, and we hardly see any of them. Why not more of them?

Hagendorff, UniCredit: It is worth noting that some Italian corporates came to the market last year, like Buzzi Unicem and Pirelli. They have access to the inter-national bond market, which is quite competitive. There are of course plenty of well known corporates that may be interested in tapping the market from those regions.

Felix Warmuth RHI Magnesita



26 Private debt

Al-Jaafari, RBI: The Italian corporates are spoilt with cheap funding, which makes it harder to attract them. But, again, there are plenty of names, that we in the German-speaking region know on a daily basis.

If you go to a supermarket or get a coffee, you’ll see these brands that are blue chips. I’m convinced that even in the smallest village in Germany, someone would invest in this kind of asset.

Looking forward, I’d love to see more from Spain and Italy, which still issue at comparatively low levels compared with Switzerland, Austria, France and the Nordics.

SCHULDSCHEIN AND THE US: Last year, a lot of people were

speaking about America. But now that’s somewhat dried up as a theme. Does the Schuldschein still have an American dream?

Al-Jaafari, RBI: We’ve seen a few issuers from the US, like Wabco. It doesn’t necessarily need to be facilities in the US — it could be issued via a European entity, and guaranteed by a company in the US, or issued from the US and guaranteed in Europe. The main

problem is that pricing is very competitive over there, so why should they? And the big US companies that need euros are usually rated, so can find tight pricing in Eurobonds.

Warmuth, RHI Magnesita: Yes, lots of US companies issued Reverse Yankee bonds in recent months. Why haven’t we seen those issuers also in the Schuldschein market?

Hagendorff, UniCredit: If you are a rated company, you can issue Reverse Yankees for sure. But I wouldn’t focus too much on a certain country in the market. The only thing that makes it challenging is that they don’t know the product.

In terms of preparation, a debut issuer from Germany can already take a relatively long time to the Schuldschein market. Now replicate that internationally, in a country outside the origin of the instrument — naturally the process can take a lot longer.

Gutermann, Helaba: There is a wide gulf between the continental way of doing things, including legal aspects, and Britain and the US. So I can imagine the US as an unexplored territory for the Schuldschein market. There is nothing preventing US borrowers accessing the market, except for unfamiliarity with the product.

We have some examples of course, like Fresenius, which can issue from the German arm to the savings banks or from the US entity with a guarantee from the German side.

On the investor side, I don’t want to touch there, as the SEC may have certain opinions on that. But the borrower side is there for the taking, if it weren’t for a very well developed bond market. But we’re getting there, and I have some assurances from our legal side that there are no obstacles in that respect.

INSTITUTIONAL INVESTORSWarmuth, RHI Magnesita: Before we stop, I would like to ask one question. We were talking a lot about diversification in the Schuldschein market. But how about a different form of diversification — getting more institutional investors, the big insurance compa-nies like Allianz, into the Schuldschein market? They give an advantage in tenor that currently isn’t there in the Schuldschein market. It’s very rare to hear some-one issuing longer than 10 years. If that would be pos-sible via institutional investors, wouldn’t that add addi-tional diversification to the Schuldschein market?

Al-Jaafari, RBI: Institutional investors are yield-driven first of all, and they usually only invest in externally rated companies. And, if a company has bonds, they compare the bond levels with the Schuldschein levels — this is a mismatch, they do not understand it at all. Often their starting question is whether we, as an arranging bank, don’t understand the markets outside. Also, Austrian institutional lenders need to be the first lender of the facility, to avoid triggering stamp duty in Austria.

To cut a long story short, when we talk to institu-tional investors in Austria, we learn that they have issues with spreads and structuring.

Gutermann, Helaba: It’s really a small overlap with longer maturities in the Schuldschein market. I’ll give you an example: we did a transaction for TenneT a few years back — we hit the sweet spot where we matched the bond pricings at six maturities, six, eight, 10, 12, 15 and 20, which was quite extraordinary. But that turned out to be a tiny moment in time, and a few weeks later the bond market was more advantageous, and we haven’t seen them since.

Hagendorff, UniCredit: If an institutional investor offers longer tenors, would you take that in return for stricter documentation needs and higher spread requirements?

Gutermann, Helaba: You need an unusual combo. An issuer willing to access the Schuldschein market instead of the bond market, and institutionals that can do their own credit work. It’s a mismatch — but it happens more often than you assume. s

Silas Brown GlobalCapital


www.globalcapital.comNews – Data – Opinion

For more information please contact: Mark Goodes, Email: [email protected] • Tel: +44 (0) 207 779 8605

The voice of the markets

ARCHIVE DATABASES MOBILE ONLINEPRINT SEARCH

Derivatives • LevFin • Asia • Equity • Syndicated Loans Corporate Bonds • FIG • RMB • SecuritizationEmerging Markets • SSA • SRI/Green Bonds

GC A4 Voice ad v2.indd 1 22/12/2015 11:38


DIGITALISATION OF THE SCHULDSCHEIN DIGITALISATION OF THE SCHULDSCHEIN

SOME SAY the Schuldschein, a cen-turies old German instrument with a reputation for prudence, is an odd home for technological innovation. But the market has a few features that make digitalisation more wel-come.

First, there is a need for more effi-ciency. Unlike the comparatively small investor pools in US and Euro private placements, a sales team at an arranging bank in the Schuld-schein market may have to field calls and emails from up to 600 investors, which requires time.

On the borrower’s side, execut-ing a Schuldschein deal can take six to eight weeks, and involves count-less interactions between arranging banks and investors. Transaction costs, like arranging and legal fees, rack up. By digitalising the transac-tion, the process could become more efficient, and as a result more cost-effective for the borrower.

Crucially also, under the German Civil Code — the legal basis of a Schuldschein contract — the prod-uct is classified as a bilateral loan, as opposed to a bond security, which means it sidesteps the complexi-ties of MiFID II and other regula-tions. This means digital platforms have much greater flexibility to test ideas in the Schuldschein market, without as much fear that regulators from the EU or Germany’s Bafin will clamp down on them.

“The Schuldschein is, in a sense, very easy to understand,” says Klaus Distler, head of corporate debt capi-tal markets at Helaba in Frankfurt. “The documentation is not cumber-some and it is standardised in the market, so it is an ideal instrument to look at digitalising execution.”

Before the groundswell of plat-forms one digital platform, Debtdo-main, existed. It is mostly used for distributing documents about new issues to the many investors who are

registered on the platform, but also allows the investor base to be divid-ed up among the arrangers of a deal, so that they can each market to a separate segment.

Last year, some 146 Schuldschein deals flowed through Debtdomain — almost every one issued.

But there are a series of inade-quacies, for example no capacity for logging soft ordering, that the other digital platforms feel they can improve on.

The process of gathering orders is something VC Trade, a new digital platform promoted by BayernLB and Helaba, has homed in on. Up to now bids have usually been collected over email, by phone or via Debtdo-main (among other routes).

Using VC’s software, investors place soft and hard orders via the platform. “What we saw was quite a fragmented [bookbuilding] process,” says Sebas-tian Glock, co-founder of the plat-form. “With VC you have a one venue approach, a centralised order book with algorithms to allocate.”

Eleven’s a crowdBut VC Trade is not alone in attempting a centralised system for the Schuldschein, and to tighten the work of Debtdomain.

Six digital platforms have been launched by banks — LBBW’s Debt-vision, in partnership with the Stuttgart Stock Exchange; HSBC’s

Synd-X; Raiffeisen Bank Internation-al’s Yellowe; NordLB’s Finpair; and blockchain platforms launched by both BBVA and Erste Bank.

Another three platforms are from fintech companies CredX, Firstwire and FinnestPro.

All of these digital platforms attempt to carry an issue from origination through to completion of execution (some claim to go through to maturity of the loan), to be a one-stop-shop for any borrower looking to sell Schuld-scheine, and any lender seeking to invest.

But there are ways of distin-guishing the digital platforms beyond this. Some platforms, like CredX, Debtvision, and Fin-pair, focus on connecting borrow-

ers with investors, without the need of an arranger managing the trade. Others, like Synd-X and VC Trade, are seeking to digitalise the process without disrupting traditional rela-tionships between arrangers, bor-rowers and lenders.

Some platforms, in particular the bank-affiliated outfits, are selective about which arrangers and borrow-ers can participate on their plat-forms. Others have emphasized the openness of their platforms, and allow any arranger, borrower or lender to join.

But though many platforms have muscled their way into the market, some have provoked more curios-ity than others, and are thought to be more ambitious. In the minds of many, two stand out from the pack: VC Trade and Debtvision. They lead the others in number of Schuld-schein issues flowing through the platforms, as well as overall volume and market share.

Investor pushbackHowever, not everyone in the mar-ket has welcomed technology. Some

The Schuldschein market has become a hotbed of technological innovation over the past 12 months, with as many as 11 digital platforms cropping up, claiming to have solutions to the instrument’s age-old, if slightly charming, inefficiencies. Silas Brown looks into the secrets to a digital platform’s success.

Schuldschein sizes up digital crowd as 11 compete for crown

“The documentation is not cumbersome, so the Schuldschein

is an ideal instrument to look

at digitalising execution”

Klaus Distler, Helaba

028_PD_Digitalization of Schuldschein.indd 28 11/06/2019 18:33


DIGITALISATION OF THE SCHULDSCHEIN DIGITALISATION OF THE SCHULDSCHEIN

investors have struggled to keep pace with digitalisation, and are exasperated by the sheer number of overtures they have received to sign up to different digital platforms.

“Every week it seems we get a call or an email from a new platform ask-ing us to subscribe,” says an inves-tor at a German savings bank. “It’s enough for us to keep up with new issues, let alone new platforms.”

Another investor from a non-Ger-man bank says: “Checking in and registering with all these platforms will be a nightmare, and particular-ly frustrating if deals are then not run through them. There’s simply no way the platforms are going to con-vince all the investors to sign up to every platform.”

This belief, if true, is a serious problem for digital platforms. To be considered of real value to the market, participants say a platform must boast all the investors as active subscribers. Only then can it claim to offer a comprehensive arena for Schuldschein issues.

This is what platforms have strug-gled with.

“In my conversations with hun-dreds of investors in the Schuld-schein market, a large number are frustrated by change, and don’t see much added value in signing up to new technology platforms — wheth-er this is just being frustrated by change, or something more, I’m not sure,” says an arranger at a Landes-bank.

Platforms need to demonstrate to investors how they are adding value.

“I see Schuldschein syndication as falling into four stages — you have invitation, then bookbuilding, then committing and finally the back

office signing off and settlement stage,” says Louai Al-Jaafari, direc-tor at Raiffeisen Bank Interna-tional in Vienna. “Each platform out there has the first three stages done, but no digital platform has solved the signing off and settle-ment stage. If a platform can solve this final stage, then investors would see real value.”

Rudolf Bayer, head of UniCred-it’s medium term note and pri-vate placement syndicate desk in Munich, says: “We are still at an early stage. The platforms have pri-marily focused on front end activ-ity, like building up order books and centralising investor questions. This is a good start, but where we see true efficiency gains is in the back office — sorting out the manual process of settlement, for instance.”

There are two ways to entice an investor on to a digital platform: offer additional functionality that will make their front and back office processes more efficient. Or give them an offer they can’t refuse.

Subscriptions, subscriptionsInvestor subscription has become the barometer for success in the market and in March Lufthansa took the daring step of selling a Schuld-schein exclusively via the digital platform VC Trade.

This meant that BayernLB and Helaba, Lufthansa’s arrangers, would not accept bids via email or phone, and a lender needed to sub-scribe to VC Trade in order to com-mit to the Lufthansa Schuldschein.

This was considered a shrewd move by much of the Schuldschein market — overnight, VC Trade had around 80-100 new investors signed

up, and Lufthansa’s order books swelled to over €1bn.

“The Lufthansa trade for us proves that we were right about being an open platform,” says Glock. “If you are an open platform, you will draw in all the participants, and if you do that you succeed.”

One investor says: “VC Trade has demonstrated a better under-standing of the market than any other digital platform that’s recent-ly launched — it understood that to capture the market you have to be open, and find ways of bringing in the investors. However, I think they should be worried about a platform they perhaps haven’t really consid-ered — Debtdomain.”

Debtdomain, the incumbent plat-form mostly used to distribute docu-ments, ran its first transaction in the Schuldschein market in September 2007 for Investec via WestLB, and counts nearly every investor in the Schuldschein market as a subscriber.

But, as primarily a syndicated loans platform, it has devoted less resources to developing technol-ogy to confront issues specific to the Schuldschein market. Howev-er, with its headstart in having cli-ents onboard, it may build addi-tional functionality to counter any edge the independents have gained through innovation.

Sean Tai, founder of Debtdomain, who has been watching the digi-tal launches, told GlobalCapital in March: “I acknowledge that we can cover the Schuldschein better and we plan to do that by adding features and functionality that is beneficial to both Schuldschein and syndicat-ed loan arrangers and investors,” he said. “This includes improving fee tracking, soft orders and allocations. And we can invest in development at a scale that newer [technology] firms could not match.” s

“If you are an open platform,

you will draw in all the participants,

and if you do that you succeed”

Sebastian Glock, VC Trade

Lufthansa took the daring step of issuing a Schuldschein exclusively on a digital platform this year

028_PD_Digitalization of Schuldschein.indd 29 11/06/2019 18:33

30 Private debt

The Paris Private Debt Roundtable

PRIVATE DEBT IN THE CORPORATE LANDSCAPE

: The Schuldschein is an ancient market, but private corporate debt really came to prominence after the crisis. That’s quite a long time ago now; things have moved on. How has private debt evolved as a part of the corporate finance landscape?

Michael Bures, RBI: Well, the English say the proof of

the pudding is the eating, and the proof of the private debt markets is the issuance volume. We can clearly see a positive trend in all the markets. Last year, US private placements nearly hit the $100bn mark, Schuldschein had around €25bn, the third best year ever. Euro private placements had €8bn, which was a decrease from the years before by number of deals, but still 10%, 12% growth compared with 2017. So obviously treasurers and CFOs have come to these markets in much larger quantities.

Our clients changed their behaviour after the crisis. Before, there seemed to be liquidity in abundance and

Participants in the roundtable were:Michael Bures, head of debt capital markets, corporates, Raiffeisen Bank International

Frederick de Graaf, corporate debt capital markets origination, France, Helaba

Salim Hasnat, managing director, private debt France, Muzinich & Co

Patrick Klein, group treasurer and financial controller, Buzzi Unicem

Edouard Lemardeley, head of debt capital markets France, UniCredit

Thierry Vallière, global head of private debt group, Amundi

Jon Hay, GlobalCapital (moderator)

Companies find new ways to link up with alternative lenders

European private debt markets are developing fast and diversifying — although many market participants would rather they became standardised. The Euro Private Placement market, founded in France, has not blossomed into a rival to the US PP. Many French issuers now travel to Germany’s larger Schuldschein market. But when GlobalCapital gathered an Italian issuer, two French investors and three private debt bankers in Paris to discuss the market, it was clear that the private debt options available to companies are now much more varied and attractive.

Yet there is still a deficit of clarity — companies could be more clearly informed about possibilities, and still sometimes find investor needs opaque. One essential question is whether private debt markets genuinely offer alternative views on credit and pricing, from what issuers can find in public markets.

Participants were convinced that disintermediation will go further but disagreed on whether the Schuldschein market is truly disintermediated, given its reliance on banks. They also questioned how efficient execution is in the various markets, and what will happen to direct lending when the next downturn comes.

030_Paris Roundtable.indd 30 11/06/2019 18:37


Private debt 31

many thought they’d rather save the commitment fee and rely on uncommitted lines. That’s totally gone.

They started to focus much more on avoiding fund-ing mismatches, no uncommitted funding any more, committed lines always available, being much more conservative.

Nowadays corporates have a lot of opportunities. They can tap the Eurobond market if they have a rat-ing, they can go to the French PP or Euro PP market, Schuldschein without a rating, there’s a local bond mar-ket in Austria, US private placements. It’s good to be a treasurer right now. You can choose and optimise your funding mix.

: Patrick, you’ve issued bonds, convertible bonds, Schuldscheine, US PPs — is it good to be a treasurer?

Patrick Klein, Buzzi Unicem: Well, it could always be better. It depends very much on which company you’re working for, especially if you’re in Italy like us. A couple of Italian issuers have been going through tough times — you’re penalised, no matter where your revenues come from. The location of your headquarters and your listing trigger a different cost of funding and a different perception among investors.

But having said that, yes, the markets, especially in the last couple of months, have improved quite signifi-cantly.

Bures, RBI: Yes, in November, December the mood was not so good. In January, February, even seasoned Schuldschein bankers were not so sure where the market would head, and even more so the Eurobond market, because there had been a significant correction starting at the end of September.

Many of us are positively surprised about the shape of the markets now, Eurobonds and the Schuldschein market. Many were afraid at the beginning of the year that it would take much worse turns and now it’s really good in all these markets.

Thierry Vallière, Amundi: The disintermediation process is a long term trend.

Just after the crisis, there was a lack of liquidity, banks became very constrained by national and interna-tional regulations, so their cost of capital increased a lot.

But companies still need to invest and start thinking about diversifying their funding. And they are interested in various things — maturity, amortisation profiles, ease of execution. Those aspects are covered by disintermedi-ated products or private products.

And investors with long term liabilities to meet are facing a huge investment challenge, because of uncon-ventional monetary policies, which have had adverse consequences for most asset classes.

In the corporate bond market, today only 23% is trading at yields above the inflation rate. Only 15% is trading above 2%. So your investment universe is really, really small in the public market.

Against this backdrop, private debt offers several benefits for investors with long term horizons and able to bear some liquidity constraint, because you can have some pick-up, diversification and low volatility.

So all those aspects help — the lack of financing from banks, the needs of corporates and also the investment challenges for investors.

Edouard Lemardeley, UniCredit: It depends on which private market we’re talking about. The Euro PP market hasn’t really started yet, it’s still very small. It’s a young product. The private debt flows are mostly in the Schuldschein, which is by far the deepest one in Europe.

Vallière, Amundi: The Schuldschein market is not dedicated to institutional investors — we cannot compete. The market is made mainly for regional German banks...

Lemardeley, UniCredit: International banks more and more, Asian banks...

Vallière, Amundi: … or banks that can use the asset as collateral for their refinancing.

I’m not saying it’s not an interesting product; obvi-ously it is interesting if you are a corporate issuer, because you will have access to a very cheap cost of financing. But you will not diversify your investor base, except you might find some other banks that you don’t have in your syndicated loan.

But for an institutional investor like our clients, they see no point, no relative value in investing in this prod-uct, because they can have access to liquid products with exactly the same underlying credit quality, with more or less the same quality of documentation, which is today very limited…

Lemardeley, UniCredit: In my opinion, the Schuldschein can be more investor-friendly, on average.

Vallière, Amundi: … but they will have the liquidity. So, it’s very difficult for institutional investors to find an interesting business model around this asset class. And this is why you see so few investors, like asset managers, investing in the Schuldschein market.

Lemardeley, UniCredit: I think the Schuldschein, at least for non-domestic issuers, is pure diversification. If I take the example of Iliad, we are about to close the transaction — they were able to address very different investors from those in a public bond, which they had done before, or in their revolving credit facility.

Vallière, Amundi: This is a perfect example — if you look at Iliad or other French issuers that have issued Schuldscheine recently, you can buy exactly the same credit on the public market with a higher spread.

Thierry Vallière Amundi



32 Private debt

Lemardeley, UniCredit: But not under the same terms. I think this is the bargain, the Schuldschein is a hybrid solution between bond and loan. But institutional investors don’t precisely value the legal terms.

: Salim, Muzinich is obviously quite different from Amundi, and yet you’re not a bank lending in the Schuldschein market either. So, what is private debt for you?

Salim Hasnat, Muzinich: Well, the world has turned to a disintermediated one. Banks slowed down the deployment of capital just after the financial crisis, leaving some space for private debt investors like us to co-operate with the banks, or to play leading roles and deploy capital into the economy.

And now that issuers have had the taste of private debt, they don’t want to turn back. They see other characteristics it brings, like flexibility, and they want to have a choice between different players — banks, public markets, private debt.

And they are very smart at understanding the key ele-ments of each player. They have access to an ecosystem, like debt advisers, so as to get the best of what the mar-ket can bring.

Private debt has reached about $769bn globally of assets under management; this will be the fourth year in a row that over $100bn will be raised in new commit-ments. So it has really created a new asset class.

DISINTERMEDIATION: FURTHER TO GO?

: Frederick, do companies still need to be persuaded of the need to move their funding away from banks, or has every company now already done it?

Frederick de Graaf, Helaba: When we speak to companies, there’s still a growing demand for private debt. We’re specialists in the Schuldschein segment — it is getting more and more international, on both the issuer and investor sides.

Since 2011 the volume has considerably increased. French clients have got a big demand for it.

Thierry will disagree with me, but I’m convinced that for issuers it’s really a diversification of the investor base to issue a Schuldschein.

By issuing a Schuldschein, the advantage for the

company is to find funding from international banks and investors without impacting the limits of the banks which are in the company’s RCF.

Generally for French or non-German issuers, there are about 30% to 40% Asian banks investing in the Schuldschein.

Lemardeley, UniCredit: Is it the end of disintermediation? Yes probably for bigger corporates, because I think their funding mix has now stabilised. But the question is, especially in Europe, for smaller corporates…

Bures, RBI: We still find lots of first time issuers in the Schuldschein market. And when we talk about disintermediation, look at the loan market. This year, the volumes in the club loan and syndicated loan markets have shrunk dramatically. It’s most dynamic currently in the Schuldschein market and the Eurobond market. Banks would like to lend again, but the demand is not there from the corporate side.

I think the lesson has been learnt. Hardly any CFOs or treasurers put all their eggs in one funding basket any more, I hardly ever see that.

: Patrick, you have a lot of funding baskets — what is your philosophy on loans, bonds and private debt. Is it all about the cheapest cost of funds?

Klein, Buzzi Unicem: Well, cost of funding can be a big issue. We have come down, over five years, to a 2% average cost of funding from 5% or 6%.

But there is also a medium or long term development. We still have bank funding, but we have become much more selective.

Why? Because now with the ECB’s new Targeted Longer Term Refinancing Operation, there is a lot of interest by banks to lend, up to four or five years.

But because bank fees are not very high in Europe compared to the US, they couple these loans with other services they want to sell.

And then, if you have a few core banks, it becomes very complicated to manage, because you always have to think, when you do something, about who you can do it with.

That’s one of the main reasons why a lot of corporates nowadays, even if they want a bank loan, they do a Schuldschein. You can do something with banks you do not have a relationship with.

There are a lot of different products, and we would like to participate in some of them. But it’s not yet clear, it’s still fuzzy. We’re still waiting for some clear indica-tions from arrangers and investors.

To give you an example, in December and January I did several meetings with investors, Italian, UK, German and French.

I discussed with them private placements. I said, ‘What are your possibilities?’ Probably these were the wrong people I talked to, but they were not so well informed. They said, ‘You can do a Schuldschein’ but there was nobody telling me, ‘OK, we have this fund, let’s have a talk.’

Lemardeley, UniCredit: Returning to my earlier point about the difficulty of disintermediation for smaller companies, I would ask Salim and Thierry how low can you go in terms of size?

Salim Hasnat Muzinich & Co



Private debt 33

Hasnat, Muzinich: We look at companies starting at around €5m Ebitda, or slightly lower in some circumstances. We go very low, because this is a space where there are a lot of needs that are not covered.

This is actually the strength of our institution, to be able to dedicate local teams. Because when you look at small and medium companies, you need to do a funda-mental analysis of those risks and have local teams able to understand local markets.

Lemardeley, UniCredit: This is where we’re lagging in Europe — when it comes to small businesses there is pretty much no alternative to banks, primarily because it can cost a lot to be equipped in credit analysis capacity.

At big institutional investors, when you bring an unrated issuer, most of the time the first question you get is ‘what’s the shadow rating?’ meaning ‘we don’t have time to look at it very deeply, so please help us’.It’s a question of being equipped to look at small corpo-rates.

: And can you answer that question, what’s the shadow rating?

Lemardeley, UniCredit: Yes, triple-A, that’s how I get the lowest price for my client!

WHAT IS INVESTMENT GRADE?de Graaf, Helaba: The Schuldschein market is considered an investment grade market, because at Helaba, when we are arranging a Schuldschein for a company, we’re selecting the issuer carefully. This is because we also invest in most of the Schuldschein issues we arrange and a big share of the investors are also the Sparkassen, the savings banks, and since they are our shareholders, we want to provide them with good credit profiles.

: And how do you define investment grade? Is it things like debt to Ebitda multiple?

de Graaf, Helaba: Yes, in part. Even if it’s an unrated company we have an internal rating system. It has a correspondence with external ratings. We go down as far as BBB-. Vallière, Amundi: I think it is investment grade, in terms of pricing and quality of documentation. But the underlying credit is something different.

There are two different Schuldschein markets, one that is really small and mid-sized German companies, and the other larger companies.

You cannot say that the small and mid-sized German companies are investment grade.

Just because of their size, the diversification of their sales, Ebitda, clients. You can call them crossover, if you don’t want to call them sub-investment grade, but they’re not investment grade.

In the other half of the Schuldschein market, there are larger companies and some of them would be invest-ment grade, some of them won’t be.

Bures, RBI: You might be surprised, but I agree. In the Schuldschein market we are very cautious

about the credit quality we bring to the market. However, I agree that this investment grade story is probably a fiction. Just because of the size of their

operations, many Schuldschein isssuers would not get an investment grade rating.

But that’s perfectly fine, because the Schuldschein market is a market for professionals. We’re not selling to retail clients, we are selling to banks. They might be small or regional banks, but they have to have some internal rating, they have to have some risk manage-ment expertise.

We need a funding instrument for these types of cli-ents, and this is what the Schuldschein provides.

What I do think is that their financial ratios should be reasonable. Especially given the covenant-lite nature of many of the deals, the net debt to Ebitda and equity ratios should be decent, because otherwise it’s not justi-fied to do a covenant-lite deal.

Vallière, Amundi: I fully agree with you. I’m not saying that it’s a bad market or that you should not go to it. I’m saying you need to consider that it’s mainly a sub-investment grade market and you will compete against banks.

An asset manager cannot compete against banks, because of their cost of funding. They have access to cheap financing through TLTRO. They can put the asset as a repo to the ECB and get very cheap financing.

Bures, RBI: I think currently the liquidity in the market has reached a point where hardly anyone even uses the opportunity of doing repo business on the Schuldschein with their national banks. Investors use it in their internal calculations, because it’s favourable, but I don’t think anyone really does it.

Hasnat, Muzinich: Products like the Schuldschein, targeting both investment grade and non-investment grade companies, and international large caps, function in a way which the Euro PP cannot really compete with on pure pricing. It’s probably one of the reasons why the Euro PP market hasn’t yet reached the size that was expected.

ASSET MANAGERS ARE LENDING

: But yet you, Thierry and Salim, have a business. You have €7bn of private debt assets at Amundi and €1.5bn at Muzinich. You’re managing to do private debt investing, in competition with all

Michael Bures Raiffeisen Bank International



34 Private debt

these other markets?

Vallière, Amundi: Last year we invested €1.3bn across the private debt expertises we’re running and we returned €1.1bn to our investors, from maturing paper, refinancing or whatever. So, yes, we find the material to invest.

The Euro PP has not emerged as what everybody was expecting at the beginning.

But Euro PP is just a name used for marketing pur-poses. It’s just a bond or loan and you call it sometimes Euro PP, sometimes a club deal, sometimes direct lend-ing.

What is important is that last year, just in France, what was identified as Euro PP was €8bn of issu-ance, but on top of that were all the transactions done through club deals alongside a bank or other institu-tional investor, that are not referenced as such, but are still disintermediated financing.

Disintermediation is much bigger than just this Euro PP marketing label. Otherwise we wouldn’t have been able to invest €1.3bn.

: What kind of companies are you lending to? Why aren’t they going to banks or the Schuldschein market?

Vallière, Amundi: Some of them are looking for diversification, some for a different maturity, a different amortisation profile. Some want speed of execution, or a specific feature in the documentation. For all of that, they are willing to pay a premium to an institutional investor.

The core for us is companies with between €300m and €500m of sales. Our business model is really to work alongside banks in club deals.

We would never replace the banks. We don’t have a deep network on the ground, like the banks that have local people in every city who can see the treasurer every week. We need to work differently, since we have a different business model. We decided to work closely with banking partners for origination.

Hasnat, Muzinich: Like Amundi, we don’t focus on the product label. If it falls under the category of Euro PP I’m fine with that and it will come into the stats, but our primary focus is to provide capital to issuers. Despite the size of the Euro PP we’ve been able to deploy a lot of capital, as there are several reasons why an issuer will turn to private debt investors.

Sometimes we lend in conjunction with banks — this is a large majority of what we’ve done. Even issuers wanting a unitranche financing will ask for an RCF, so there will be a bank; some hedging — there will be a bank; some leasing — it can be a bank or another entity.

So we really partner most of the time with banks. And we can provide mezzanine financing, on top of a bank solution or not. We can even provide PIK loans, which are more seen as a quasi-equity instrument.

So there are a lot of reasons why issuers come to us, whatever the sizes of the Schuldschein, bank or Euro PP markets.

DO PRIVATE INVESTORS THINK DIFFERENTLY?

Klein, Buzzi Unicem: Is there a market where investors

are interested in our credit profile and not so much in our secondary bond curve? That’s the key issue.

If you are basically issuing a bond, but it’s not liq-uid and you just sell it to one or two investors, who still look at the secondary curve, for us it’s much less attractive. We will still have volatility — as an Italian issuer you just need a bad newspaper headline and your spread is 50bp higher, so it’s extremely difficult to man-age the windows of opportunity.

But if you have more of a loan profile, where a lender is willing to look at our credit profile, and take a deci-sion that is valid for a period of X months, notwith-standing whatever adverse change can happen, then we have a completely different approach.

I would like to understand how you deal with this — do you have segmentation, do you do something bond-like and something more loan-like?

Vallière, Amundi: We are interested in the underlying quality of the business we’re investing in, because we are long term investors. So, first of all, we perform a due diligence. Then we try to mitigate the identified risks using appropriate documentation. So, if you are in a capital-intensive industry, we might find some mitigant to encapsulate this risk.

We are absolutely agnostic in terms of market, geog-raphy and format. We can cope with all of them. So if you want to go in the Schuldschein market, we can go with you, but we’ll draft the legal package in a way that satisfies us, and that will be different from the standard Schuldschein docs.

On the pricing, I need to demonstrate to my client that if they come into a private debt fund I will bring them some added value that they won’t have in the tra-ditional public market.

It can be diversification, because they will not find the same credits in the public markets. But I will also bring them some extra return.

So if you have an implied rating of BBB-, and we are discussing a 10 year maturity, I will look at what the public market can provide. I will add a certain premium, let’s say, 100bp.

This could be reduced, because you grant me some guarantee or covenants that I don’t find in the public market.

Lemardeley, UniCredit: And this is one of the weaknesses of the Euro PP market.

As an issuer it’s important to have a highly predict-able and visible process, something very organised.

Patrick Klein Buzzi Unicem



Private debt 35

What you’ve described is an ongoing discussion, pre-cisely what a club deal is — you have to negotiate with various parties to reach a position, but you don’t know how long it will take, or what the outcome will be. You can’t create tension with the lenders.

So for an issuer it doesn’t bring any comfort and that’s why we see so many issuers going to other funding sourc-es, because they will find predictability and visibility.

Vallière, Amundi: To have predictability and visibility on pricing you need to have an underwriting backstop from someone.

Nobody is providing that in the Schuldschein market or the traditional fixed income market. You get a price range.

Lemardeley, UniCredit: No, you have a market, you have reference points, and OK no certainty, but what is the certainty in the Euro PP process, that you will have a trade in the end?

Vallière, Amundi: Exactly the same as with fixed income, since the final investors are the same institutional investors.

Lemardeley, UniCredit: I don’t think so. And it can take a long time. It’s a very young product, officially it was created in 2012, so there’s still a long way to go.

But it’s not very well organised at the moment, there are too many players, too many go-betweens who try to bring opportunities, when they’re not completely sure they are valid opportunities.

That’s a big difference from the Schuldschein market. There, the league table’s pretty much fixed, there are arrangers, which are I think respected by the rest of the market, they know what they’re doing, they know what kind of issuer they can bring to the market. So the way it works is quite solid.

Hasnat, Muzinich: With a little organisation you can get the same security of financing in a Euro PP as you would with banks. For instance, I’ve seen some Euro PP financings where there was a competition between several final investors, to reach the best terms and conditions for the issuer.

Because those processes were very well run, there was time for education on the issuer, for analysis of the documents and for due diligence. And time for really committing and giving certainty to the issuer. With organisation you can achieve those goals.

RELATIVE PRICING: Something we’ve touched on is the

relationship between the pricing at different times in public and private markets. Private debt is claimed to have a calmer attitude to credit — not so volatile. But at the same time almost everybody here has referred to how the Schuldschein market, for example, is connected to public markets. At the beginning of this year when conditions were rough in public markets, so it was in private markets. So are they genuinely a safe haven for borrowers?

de Graaf, Helaba: We see that corporate clients, when they need funding, and the public bond market is closed, shift to other markets. The Schuldschein market is therefore a good alternative.

At the end of last year, conditions in the public mar-ket were difficult. Faurecia, for example, in the automo-tive sector, decided to enter the Schuldschein market and they issued a €700m Schuldschein at really good conditions, with different tenors in euros and dollars. I wouldn’t say it’s a safe haven, but it’s a really good alternative when the bond market is volatile.

: So, perhaps more reliable, but didn’t those Schuldschein investors charge a higher rate than four months earlier when the market was really good?

de Graaf, Helaba: Investors in the Schuldschein market are focussing on the credit of the issuer. It’s not really comparable with an investor who’s investing in the bond, for example, because there are other metrics to consider.

Bures, RBI: Many of the typical Schuldschein investors cannot invest in bonds, because they don’t have the infrastructure. I have the feeling investors more and more look at Bloomberg and check out the spreads, but not all of them can demand a wider pricing.

They can inform themselves about that, but not all of them can buy bonds, which they would have to mark to market.

That explains the discrepancy in pricing to some extent. It’s a different investor market, they can’t just switch products.

Hasnat, Muzinich: The Schuldschein is one among several financing options. It’s worth keeping in mind that private debt investors have about $307bn of dry powder to invest, which gives issuers some protection. If some other sources of financing dry up, those will still need to be deployed, because we are talking about closed end funds with commitments from limited partners.

It’s also a protection against pricing volatility, because when you need to deploy such an amount, the econom-ics are more related to the quality of the issuer and specific risks, and less to overall financial industry con-ditions.

Lemardeley, UniCredit: Yes, the Schuldschein is much more resilient, but that doesn’t mean there is always an arbitrage for issuers. It very much depends on whether you’re rated or not. Structurally, for unrated issuers, at least in France, there is an interest in going to the

Edouard Lemardeley UniCredit



36 Private debt

Schuldschein market. For example, Orpéa is quite a sizeable company which has tried other private and public debt markets, but has decided to exclusively fund itself with Schuldscheine.

For rated issuers, we’ve been in a bull market for the last three or four years and there was no reason to look at the Schuldschein market.

That changed a little at the end of last year, and I’m sure it will change at the end of 2019 or in 2020, as I think the public debt market will be shakier in the com-ing months.

de Graaf, Helaba: The Schuldschein is also a dynamic market, because, as Edouard mentioned, there are more and more international issuers. Especially since the beginning of this year a lot of French issuers have entered for the first time. There was Peugeot, Faurecia, as well as Iliad, the French telecoms company.

The new LMA Schuldschein documentation, for which Helaba was one of the leading project managers, was introduced last October. It has standardised all the technical definitions, and encouraged issuers and inves-tors to consider this product.

Also on the distribution side, we introduced last year our digital platform VC Trade, which has had a strong performance since the start.

: Patrick, you’ve heard some answers to your questions about how pricing operates in these markets, but what is your experience? Do you see all these funding options as a fluctuating parade, where one is more competitive at a different time than another, or is there generally a hierarchy?

Klein, Buzzi Unicem: The last few years were probably not very typical, because bond markets were very bullish and they outperformed, for example, the Schuldschein in pricing for a year or more.

This has changed. Now you have a funding arbitrage if you use Schuldschein. So it depends on timing.

One of the reasons why we like the Schuldschein or other products, also loan structures, is that it’s more resilient and you have a longer period when you can decide.

We don’t have an EMTN programme where you have flexibility to immediately go to the market. So, even if we do our documentation for a bond issue in 10 days, we could still have 10 days of volatility.

But I would like to ask something about the US PP. We get a lot of proposals from US insurance companies for US private placements in euros.

The pricing gets very competitive — it’s comparable to the Schuldschein market at present. And they will go 10, 15 years. A Schuldschein or bond goes up to 10 years.

But like European investors, these US investors also have to deploy their capital in the best way possible for them. Perhaps there’s more competition in the US, but for them, this seems to work.

Vallière, Amundi: Obviously we’re not a US life insurance company, so it would be difficult for me to answer what is the rationale for them to lend in Europe.

We’ve done some transactions alongside them and we’re currently doing one in Spain. But most of the time they are able to cope with very large size, in excess of €100m tickets. So it’s not the usual thing we’re doing.

But we’ve seen that with some clients they have made

extremely aggressive proposals.Apparently they’re winning more than 1%, just on

the FX effect, which certainly helps them to provide this extremely attractive cost of financing.

We lost two opportunities recently in France against US lifers and one in Spain, just for pricing reasons.

THE FUTURE: We’ve talked a lot about how the

market is — let’s talk about what it could become. Is it at a steady state, or on a trajectory? And will the way it evolves depend on external factors, such as regulation?

Bures, RBI: We are asking the big questions now! I can mainly talk about the Schuldschein market, where the elevated issuance volume over the last three years is here to stay.

The market is very well established now and we can still diversify the issuers.

We are testing the water in central and eastern Europe. Spain and Italy might be hopeful markets. Some issuers from even India and China have tried to issue, and we could perhaps go into the UK, once the Brexit dust has settled.

And the Schuldschein market is well prepared for an economic downturn, because it is not dependent on a single industry — it’s very diverse.

And although the Schuldschein is such an ancient product and conservative, we’ve started a lot of activi-ties in platforms and digitalisation. Several scenarios are possible — there might be one or two emerging as the winners, or a totally new player might become the most popular platform. Or the back offices of banks might become more digital and connected to each other by interfaces, we don’t know.

But I think we’ll see quite a lot of positive develop-ments. As long as the arrangers are prudent in terms of the credit quality they bring to the market — and I

think we can say we are prudent on the whole.There will always be exceptions, but if you think

about the volume in the market and the number of defaults, this proves most of the market participants are really reasonable.

: Frederick, do you think the regulators will start to play a more active role?

Frederick de Graaf Helaba



Private debt 37

de Graaf, Helaba: In the Schuldschein market, the regulators are not trying to change things. The Schuldschein is a loan, so it’s not comparable to a bond, they are two different things. So I don’t think that in the Schuldschein market there will be a big change in the coming years.

But I agree with Michael that on the geographic devel-opment there’s a lot of room, since the Schuldschein is getting more and more international.

Lemardeley, UniCredit: Private debt is a very fashionable product. It covers many asset classes, many ways to execute a transaction, but in the end it is about confidentiality, resilience — all those things we don’t find in public markets.

I see the whole sector becoming more and more standardised. There’s one private debt product we haven’t discussed, which is all the new initiatives in France from the Banque de France — the new MTN, new CP. Those products are extremely documentation-light, which obviously favours issuers.

More and more we will go for light processes in terms of documentation. We will end up getting rid of the listing, because this is something issuers very much want, and there’s not much value for investors in having a product listed. You’re not so obsessed with the liquid-ity, but much more with credit quality.

So there is a bright future for private debt, and we see more and more big corporates looking into it, because it can be efficient in terms of process, it’s less volatile, and it’s getting deeper and deeper.

I’m still doubtful about direct lending. We see very solid investors in that segment, with real capability in credit analysis. We also see very opportunistic approaches.

For a borrower, when you go for private debt, it’s also to have long term partnerships with very reliable partners. So I’m not sure all the direct lending players will survive and be as active as they pretend to be at the moment.

Hasnat, Muzinich: I would also say there’s a bright future for private debt, because compared with other sources of financing it’s still growing, it’s still nascent. There’s still attraction.

And we have a pretty limited allocation. The top 50 investors in the world have about 5% of their assets in private debt. That will grow for sure, because there is way more room to take. And because it corresponds to the needs of investors.

What could be changed in future to help the devel-opment of the industry? Many things have been done, because the regulators have understood early that they have to avoid systemic groups bringing financing to the economy and then if there is a financial crisis, every-thing dries up and it’s a global collapse.

The regulators really understand why they have to help different kinds of private debt and multiply the sources of financing and the actors that will bring liquidity to the economy. What they can do to sustain this trend is to look at very basic elements. The rules can be very different from one investment vehicle to another.

Sometimes you have tax issues when you invest in one vehicle versus another, or in one geography ver-sus another, within Europe. So national and European rules should be simplified, so that you don’t have local legislation that prevents the development of private debt.

: Salim, to go back to what Edouard said about direct lending, you’re part of that market — are you worried that there are rash lenders?

Hasnat, Muzinich: Well, if direct lending in future will be no docs, investors that know nothing about our industry coming into vehicles and investing in companies they don’t understand — this is not what we do and probably not what the regulator will allow.

But I don’t think this is happening, because I believe that if private debt is taking some space currently and developing itself, it’s because it brings a valuable solu-tion. What you describe is not valuable. So I guess that at that point there will be someone saying ‘That’s the end of the game and here are the rules.’

IMPROVING COMMUNICATION

: Patrick, do you think the private debt markets need to evolve more?

Klein, Buzzi Unicem: It was interesting, the private placement in France only came to my knowledge maybe a year ago. A French bank sent me a statistic, and I was like, ‘OK, what is this?’

We had been discussing with various investors in the past, but it was never mentioned. This shows that there is a lack of information for issuers. The banks will sell me the product they know best, which is normal, because they have to play to their strengths.

So I think the key element for an issuer is investor relations. You have to know your investor and the inves-tor has to know you. This is true for all products, public, private, and it will become much more so.

This is the future if we’re talking about environmen-tal, social and governance financing. The use of proceeds will be a key element. To teach your investors about your business, and what are the challenges regarding the environment and other issues, is key.

And I think it should be rewarded. We should see a distinction between companies that are very proactive in talking to investors, and ones that are maybe just once or twice tapping the market, which should pay higher premiums. Because it is very hard for an investor to understand the specific challenges we face every day. You need a lot of information.

So we are not against the idea that there will be very different products, we need different maturities, struc-tures. But it needs to become more transparent how you can improve your cost of funding.

In the US, they tell me, if you go to the market for the first time, you would pay a higher premium, but less the second and third time, and they can really give you the numbers. I haven’t seen that yet in Europe.

Bures, RBI: Yes, but I think already now it pays off to have good investor relations. I can’t quantify it, admittedly, but companies that actively talk to investors and where the quality of the reporting is good and that are open, this pays off.

Klein, Buzzi Unicem: I’m not just talking about communication to investors, but the other way.

There may be some covenants that are necessary for one or other investor. If I know that I want to go long and I want to go, for example, with Amundi, then I



38 Private debt

should be able to consider this product with certain features that I know upfront, and compare it with other options. But today this is not very transparent.

Vallière, Amundi: What could help to develop these markets — I would agree with Salim, it’s not something easy to implement.

But the US market is homogeneous, which is not the case in Europe. You have different banking systems, tax rules, corporate laws, insolvency processes.

This is complex because you have a lot of relative value issues when it comes to one country compared with another. So if by chance it was harmonised, it would help to develop the whole financing markets. But probably most of us will be retired by then.

And this is still a very young market with a lot of newcomers that have not been through the credit cycle. There are a lot of small lenders with some funny business models.

But to do it properly it’s really a human resources-intensive business. You need to have a lot of people doing the analysis, discussing with the corporates, engag-ing with them and getting to know them.

You also need to follow them during the life of the credit. At some point you will need to cope with waivers and amendments. To do so properly, you need a lot of people. So if the credit cycle turns, we might see a con-solidation between the various actors.

ESG IN PRIVATE DEBTHasnat, Muzinich: In the future ESG will be a key element. Not only because it’s a fashionable word — it will be necessary for all actors of the economy and financial world to follow that trend, because if you don’t put in place sustainable solutions, there is no future. It’s coming slowly, but more and more in this industry ESG components will be implemented, not only as a general commitment of a firm, but as a way to analyse an investment. It’s also a way to understand the risk. Monitoring those elements translates into better investment decisions.

: There are now syndicated loans where, for example, a base margin is agreed at 60bp, and the company can get it reduced to 55bp, if they hit certain ESG targets during the life of the loan, or it can go up if they become worse. Could that ever happen in private debt?

Hasnat, Muzinich: It could be a short term incentive, but it’s probably not what will happen in future on the longer term. ESG is really a key component of an investment strategy. It’s not only a reward for issuers doing their job well.

de Graaf, Helaba: Corporates often ask us about this. But we always get the same question from them — ‘I know it’s good, it’s really en vogue, but on the pricing side we don’t see any difference. And there’s more work for us to do — all the reporting and to mandate an external agency who is targeting these criteria.’

It’s rather a question for investors, if they would be ready to have less yield on private debt issues fulfilling ESG criteria.

In the public market, there’s no pricing difference at all, we rather see that on the secondary trading levels, green instruments trade better. But on the private side,

for the Schuldschein, there is no difference in the pricing.However, this is clearly a trend, especially in the

French market, where we see a lot of ESG issues, for instance in the public bond market. Helaba is also active in this market with green Schuldscheine we arrange and our aim is also to support this market.

Bures, RBI: Borrowers have become very interested in this, probably because of the news coverage of the ideas being pondered by the EU. They hope to get a better pricing and also think it might fit with their business models and their marketing.

But right now it has not been entirely thought through. For the Schuldschein market especially, inves-tors are mainly banks. Banks have to have a rating model approved by the financial authorities and I don’t know any supervisory body in the EU yet that would allow banks to factor the ESG component into the rating.

If you’re allowed to give a better internal rating to a bor-rower for ESG reasons, then you can give better pricing.

But as long as this is not the case, yes, we can do this slight adjustment that you’ve spoken about, for loans, where if you reach certain targets we can adjust the mar-gin by a few basis points. But for banks as investors, we are not there yet, because unlike institutional investors they don’t have dedicated green funds.

Klein, Buzzi Unicem: I was here in Paris a couple of months ago, talking to an investor, and they were telling me: ‘We cannot invest in cement right now. There’s a new article in France regarding CO2 footprint and cement is one of the top emitters of CO2, because you have a fuel-consuming kiln process with high temperatures and the calcination process from limestone to cement results in CO2 emissions. Our carbon footprint would be very different if we invested in highly CO2 intensive segments, such as cement. Therefore we have decided with the board not to invest for the time being.’

We see it also in the EU Commission right now with the Taxonomy they’re developing that may lead to a change in investors’ assessments. So this is quite urgent, it’s happening. Banks will be pushed to get there, I’m quite sure of it.

Bures, RBI: I totally agree that it will come. And let’s hope the regulation will not be too bureaucratic and will be very much orientated to real business, because let’s hope what you are telling us will not happen on a broader scale.

Klein, Buzzi Unicem: We are considering right now an ESG financing with investors, arranged by a bank — but not because we want to have a lower coupon. It helps us to quantify.

We have an ESG strategy, a sustainability report. But if you have a couple of investors asking you, ‘OK you want to reduce your CO2 by 5% in the next two years, how will you do that? What are your investments?’ And then you get the proceeds for this.

This is very helpful for internal purposes, because you can quantify the cost of capital. You can say, we got this money for this investment in reducing CO2 from inves-tors that normally we wouldn’t have been able to access, at a decent price of course, though not necessarily a lower coupon than comparable financing.

This triggers a process internally that speeds up deci-sions on these investments. So it’s quite useful for corpo-rates to have these pushy investors. s



EURO PP

THE LOGIC that Europe should have a private debt placement market of its own, to match that of the US, is hard to gainsay. Europe’s economy is a similar size; it has companies not suited to the public bond market, because they are unrated or do not want a big lump sum.

After the crisis, when banks balked at funding companies and institutional investors were strug-gling to find yield as interest rates fell, this idea’s time had come.

The UK had its own currency and long links with the US PP market; Germany had its Schuldschein. So it fell to France to create the Euro PP. The French corporate finance com-munity got behind the idea in 2011-12 and made it happen. A collective effort produced a Charter, docu-mentation, new teams at investment banks, conferences.

Seven years on, the buzz has gone. The initial burst of issuance has not surged into anything like the US PP market. The first wave of French midcap issuers has not been replen-ished sufficiently, so the average deal size is just €60m. The product has not so far attracted many issuers outside France, enabling it to grow into a pan-European market. Many of the bankers who led the early drive have moved on.

Where was the flaw in the logic? First, Europe is not the US. The 3,000 Russell-listed US compa-nies have an average market cap of $10.8bn. The average of the Stoxx Europe is €13bn, but there are only 600 of them. European industry is far more fragmented, so the number of companies big enough to borrow €100m is far smaller.

Second, what seemed in 2012 an ideal time to launch an institutional

debt market quickly became a harsh one. European Central Bank presi-dent Mario Draghi did “whatever it takes” to save the euro — squashing interest rates and pumping money into the banks.

At the beginning of 2012 the aver-age five year euro government bond yield was 1.6%. By early 2015 it was negative, and it has stayed that way.

Banks may carp at low rates, but they can borrow cheaply if they have to lend cheaply and leverage their capital. Not so insurance companies and pension funds — their savers want a real, positive return on their money. Earning 100bp over a five year mid-swap rate of minus 0.1% is not going to keep anyone warm in retirement.

Diversity playThis does not mean companies have given up on capital markets and turned back to traditional bank financing. The modern treasurer wants diverse funding sources.

But the new Euro PP has two rivals: the Schuldschein and US PP. Each has many experienced inves-tors, only too happy to soak up deals from France and elsewhere.

And each has a secret weapon. The Schuldschein’s is that its inves-tors are banks, which can lend at far lower rates than most institutions.

Rudolf Bayer, head of MTN and private placement syndicate at Uni-Credit in Munich, points out anoth-er. “The Euro PP requires a bond documentation,” he says. “It’s much more complicated for an issuer to set up, compared to a Schuldschein, which is a loan based on German civil code regulations.”

The US PP is dominated by US life insurers, which need to make infla-tion-beating returns — but they aim only to beat the tightly priced US public bond market and can pick up money on the basis swap to dollars.

Despite all these headwinds, the Euro PP is not doing badly at all. “The commentary is too harsh,” says Michael Bures, head of debt capi-tal markets, corporates, at Raiffeis-en Bank International. “Eight billion euros of issuance in 2018, in small-

er deals for smaller corporates — that’s really useful for the economy. It’s super-useful to have a domestic market where you can borrow, as an unrated company, or one with special needs, such as for longer maturities.”

The space for the Euro PP is squeezed by its two bigger neigh-bours, but there is a space.

What the Euro PP lacks is a clear profile. That €8bn is far higher than the €1.7bn counted by the law firm CMS Francis Lefebvre, which tracks all press-released deals.

Yet the €8bn figure is also too low. Amundi lent €1.3bn in 2018, but much is in bank-led club loans not counted in statistics. Niche asset managers like Muzinich and Tike-hau seek out smaller companies with specialist needs and offer a variety of debts including unitranche and mezzanine.

For single-B issuers and below, neither the Schuldschein nor the US PP market is receptive. “That is for the Euro PP market,” says Bayer, “which offers a different investor base that looks at companies in a different manner.”

In March, Compagnie de Phals-bourg, a privately owned shopping centre developer, issued a €112m green Euro PP paying 5% to its five year maturity. With mid-swaps at around zero, that was a 500bp spread — almost unheard-of in Schuldscheinland.

This need is not likely to go away, nor is it confined to France. Institu-tional direct lending, of which the sapling Euro PP is part, will one day be an oak. s

The Euro private placement as an organised, visible, investment grade-like market has disappointed its founders. But despite unfavourable monetary policy, institutional corporate lending has taken hold. As Jon Hay discovers, the deals are there — but well camouflaged.

Euro PP: not dead, but in hiding

0

0.5

1

1.5

2

2.5

3€bn

2012 2013 2014 2015 2016 2017 2018 2019to May

Listed Unlisted

Publicised Euro PP issuance has declined

Source: CMS Francis Lefebvre Avocats

039_PD_Euro PP.indd 39 11/06/2019 18:39

40 Private debt

London Private Debt Roundtable

: Why are private debt markets so strong at the moment?

Konrad Merkofer, UniCredit: The markets are strong indeed — at least from the investor side. But you have to differentiate between the markets. The standalone private placement in Europe is used more for crossover and lower rated names. In that space we have had an ever-expanding investor base over the last few years, mainly because investors are looking for additional

yield in the current low rates environment.The problem in this market has been the lack of issu-

ance — simply because bank financing has been a very strong competition. Now that seems to be changing a bit and we see a lot more interest from issuers looking at the capital markets channel for funding.

The Schuldschein is a different story. The investor base is different, but it has also been expanding over the last few years. But the pricing is a lot closer to loans, so you have always had a strong interest from issuers.

Participants in the roundtable were:Louai Al-Jaafari, director, loan syndications, Raiffeisen Bank International

Heiner Boehmer, general manager, head of international corporate clients, Helaba

Inês Faden da Silva, treasurer, Tideway

Simon Fretwell, head of private placements, M&G Investments

Martin Leighton, director of corporate finance, Great Portland Estates

Ewan Macaulay, managing director, head of private placements EMEA, MetLife Investment Management

Konrad Merkofer, MTN and PP syndicate, UniCredit

Toby Fildes, GlobalCapital (moderator)

US PP buyers stay strong on UK as SSD goes international

The UK’s private debt market is one of the most vibrant in Europe. London is the most active centre in Europe for US private placement investing, and UK borrowers have longstanding links with that market. US PP investors have also found themselves very receptive to more complex infrastructure credits.

Schuldschein arrangers, meanwhile, have found it harder to make headway in the UK than in other regions such as the Nordic countries and the Benelux.

GlobalCapital brought together Schuldschein and US PP experts in London in mid-May to discuss the advancement of the private debt markets in Europe and beyond.

Differences between the two products were discussed, such as pricing, maturities and documentation. But similarities were also apparent, including the ability for an issuer to diversify its investor base, flexibility of structures and ease of use.

All parties remarked on how private debt has grown in importance for issuers and investors in recent years and that it has evolved from a niche product into a mainstream funding tool for companies, big and small.

They were confident that private debt would continue to grow in prominence, despite challenges such as Brexit, a slowdown in global and European growth and a potentially resurgent loan market, thanks to a new round of cheap bank refinancing from the European Central Bank.

040_London Roundtable.indd 40 11/06/2019 18:41


Private debt 41

Heiner Boehmer, Helaba: My spectrum really is the Schuldschein market. Here we have seen an ever-expanding investor base over the last few years, mainly investors looking for additional yield in the low rates environment. So we have lots of investors but not enough supply. This makes for a strong market, competing well with, for example, the bank market.

The Schuldschein market has grown quite substan-tially over the last 10 years; in the last two years we have seen between €25bn and €30bn issued a year, so quite solid. And it has internationalised quite a bit — up to 40%-50% of that is coming from international issuers. There are an increasing number of international inves-tors as well.

For issuers the main motivation is diversifying their funding base. But also now, following the Loan Market Association standardisation of terms, simplicity of docu-mentation. The LMA’a involvement has helped give the Schuldschein a rubber stamp of approval. And let’s not forget the product offers very competitive issuing costs.

: Martin, you’re not a Schuldschein user but you are a US private placement issuer. How do you see this market performing?

Martin Leighton, Great Portland Estates: The US PP market is very strong. It has many advantages from an issuer’s perspective, which is underlined by this very large element of more demand for the paper than there is supply. It feels like it’s been an issuer’s market for some time. It’s a flexible market — lots of flexibility on currency, maturity, size, structure, etc. Delayed draws. There are just many elements to it.

Investors know the real estate sector very well — there’s been lots of issuance from it. It’s quite predict-able: the banks can advise you, fairly accurately, on where you’re going to end up on your deal in terms of pricing.

You get to know the investors very well too, which we really appreciate. They work with you in your busi-ness and you hopefully grow together.

The number one thing, from my perspective, as to why it’s a good market, is it can see through volatility. The public market catches a cold sometimes, as we see at the moment. The private market seems to be able to take a longer term view. It’s more of an invest and hold, rather than secondary trading-type set-up. And that pre-dictability and dependability is extremely valuable.

Louai Al-Jaafari, Raiffeisen Bank International: I can talk only about the Schuldschein. My main point is that it’s a resilient market — we saw it in 2008, we saw it in the euro crisis in 2011. And we saw it before the ECB started its bond buying programme in 2016.

Simon Fretwell, M&G Investments: Building on what Martin said, regarding the private placement market, it’s the flexibility that stands out — it makes it very attrac-tive to issuers.

On the investor side, the diversification is attractive. We do have occasional problems; but they get

resolved in a fairly orderly manner. The further we get from 2007-2008, I think that this becomes more and more important.

One of the differences in recent years has been that

people have stopped focusing so much on illiquidity. A lot of people used to say ‘we don’t like private place-ments because of the illiquidity’. But the public markets are so illiquid now, almost disturbingly so, that people have grown into the illiquidity.

Ewan Macaulay, MetLife Investment Management: We at MIM are investing on behalf of insurance and pension companies. We’re active predominantly in the US private placement markets. The reason that we, as an insurance company, and our third party clients like the product is the diversification. I would summarise it as: the risk-adjusted return is superior in our eyes, com-pared with, say, a public corporate bond.

You’re getting a premium for illiquidity, which we are prepared to bear because we are long term buy and hold investors. But you also have structural protections through things like covenants, which we’ve seen over time provide a very strong downside backstop to our investments.

The other element, again from an institutional inves-tor perspective, is it’s a great product because you can match longer term liabilities with longer term assets. You can also mix and match out to 10 years and longer, currencies, fixed versus floating.

It’s that flexibility, which appeals to the issuers as well, because they can also try and find tenors and cur-rencies that work for them.

: What were the attractions for you, Inês?

Inês Faden, Tideway: It was two-fold. We’ve only done one US PP, but it was very clear it was a very stable market. And there is a deep love and understanding of infrastructure. There’s a good understanding of the util-ity sector in the UK.

In November last year the UK public market closed early, about mid-November, due to the volatility. A lot of people moved on to US PPs. We weren’t in the mar-ket then, but talking to banks and investors, it was clear a number of UK issuers just moved on to this market.

We have an asset that is linked to inflation, so we were looking for a lot of inflation-linked debt. And because we have a government support package we have some limitations on how much hedging we can do.

It is a very bespoke market in the UK. It’s not that big

Martin Leighton Great Portland Estates



42 Private debt

but it’s big enough for our needs. We’ve issued £2.5bn of debt, of which about £1.5bn is in private placements in the UK. And there’s still quite a lot of appetite. We’ve done consumer price index-linked debt, CPI with a col-lar, retail price index-linked. The last five bonds were done on a green basis. We may even green the private placement retrospectively.

We have quite varied financing needs — we have a lot of different maturities out to 40 years — so the flex-ibility of private placements has been very helpful. That enabled us to take advantage of favourable market con-ditions and derisk the financing of the project, because we have a six or seven year construction period. We didn’t want to wait to raise the money.

Al-Jaafari, RBI: Ewan, do you have Schuldschein invest-ments in your portfolio? And if not, why not?

Macaulay, MIM: The short answer is no. We’re primar-ily a US investor from a domicile perspective. And there are certain elements of the Schuldschein documentation that just don’t work for us as a US investor. We can get into the detail, but essentially things relating to sanc-tions language, etc.

: How do people view private debt nowadays as a funding tool? It seems like it has moved up the agenda for most European companies over the last 10 years. Why is this?

Merkofer, UniCredit: We definitely have a variety of possibilities these days — the US PP, the Schuldschein, the Euro PP and then the syndicated loan and public bond markets. Every single product has a well defined investor base, and for issuers with different needs. In the US PP market you can get long maturities, which is one of the biggest advantages. You have the Schuld-schein which offers lower costs, but a shorter maturities.

In addition, there are now more private placement products for lower rated issuers. Back in 2007-8 they didn’t exist. And then you obviously have MTN pro-grammes for the investment grade issuers, and if you’re a big enough issuer you also have the public market.

Boehmer, Helaba: It’s related to the financial crisis. There was a point when issuers found they needed to diversify and not rely so much on bank funding. All

the different instruments have developed over time and been customised to the demands of the borrowers, and this has helped grow the various markets.

You see this in the Schuldschein market, which has become much more international and larger.

Al-Jaafari, RBI: The borrowers’ funding requirement has changed, or increased in the last 10 years. Refinancing has become a bigger activity in the Schuldschein market.

It’s quite, maybe too, easy to write the use of pro-ceeds as general purposes, and nobody really asks what it means. But behind this you can refinance your bonds, you can do acquisition finance. You could use the pro-ceeds to build facilities. There are a range of things you can do with this term.

In the meantime blue chip corporates have become more comfortable using the product, especially when the bond markets have been volatile. Remember the automotive crisis around the VW emissions scandal? Daimler immediately switched to the Schuldschein and could issue a transaction at very competitive levels, lower than what was available in the bond market.

Lufthansa did the same — when the bond markets were quite volatile it switched very easily to a Schulds-chein. Another was HeidelbergCement, which in 2015-16 issued a Schuldschein, because at that time the bond market proved expensive. Then a year and a half later they were able to refinance it easily in the bond market, at much lower levels than in the Schuldschein market, because of the flexibility of the structure. Fretwell, M&G: When you talk about these internation-al companies, are you talking about what I would call the international Schuldschein? So not Mittelstand com-panies being sold to German-speaking investors? Rather, the ones that I would call international, are being sold to international investors across Europe, Asia etc? I do see two distinct sections of the Schuldschein market.

Al-Jaafari, RBI: It is true that there are effectively two sections in the Schuldschein market — German-speaking (Germany, Austria and Switzerland) and international. Last year we saw Agco, a US corporate, which has an entity in Switzerland, in the market. This was Agco’s second Schuldschein in the last four years, and was quite a success. This international segment has really gained success in recent years and has captured a lot of visibility and attention.

You’ve also seen Petrobras from Brazil issuing a Schul-dschein, and Etihad Airways.

Simon Fretwell, M&G: Are these placed in Germany or...?

Boehmer, Helaba: In Germany and internationally. Taking another example, we did French automotive sup-plier Faurecia at the end of last year. That was €500m in euros and $250m in dollars. The investor mix was 60% German and 40% international.

: So when you say international you don’t just mean Austrian and Swiss?Boehmer, Helaba: No, I mean Asian, Middle East, even South Americans. This is one of the really big changes in recent years.

Louai Al-Jaafari Raiffeisen Bank International



Private debt 43

Merkofer, UniCredit: Another driver for the rise of pri-vate debt since the crisis is the low interest rate environ-ment, with investors needing to find additional yield.

The Schuldschein is not a market where yields are higher — in fact they are sometimes well below the bond market. But the low interest rate environment has also opened up the possibility for smaller companies to tap the capital markets, when they didn’t have that opportunity before.

All of a sudden over the last few years you have seen more and more dedicated debt funds co-focusing on this market, and that has helped to bring private debt into the consciousness of many smaller companies.

Faden, Tideway: One asset class in particular that has grown quite a lot in the past 10 years is infrastructure. A lot of institutional investors have set up teams in this space. The paper we issue is very well matched to the needs of pension funds and insurance companies. Our long-dated paper is linked to inflation, which wasn’t available in this market 10 or so years ago.

: Do you think the infrastructure asset class hadn’t been particularly well served by the public bond market or the post-crisis syndicated loan market?

Faden, Tideway: I wouldn’t say so. Actually, especially in the UK, infrastructure or utility-type borrowers have been going elsewhere because they get much better terms — whenever they go to the public market they’re very well received.

Fretwell, M&G: Over the last 10 years since the crisis, banks have changed their attitudes. Their relationship bankers used to say: ‘you come to me and we’ll do a loan.’ They might then stick a swap on, that kind of thing, to generate fees. They sometimes mentioned what they were doing to their capital markets and pri-vate placements people. But, the whole structure of the banks has changed. It’s taken years to happen in the UK but now bankers are pushing the private product more with their clients as bank capital is scarcer.

Faden, Tideway: They use the balance sheet more selectively, and use it to lead on to private placement and capital markets opportunities.

Macaulay, MIM: Talking of bank balance sheets, anoth-er element is that in the public market there are fewer banks acting as intermediaries, so there’s less liquidity in the public secondary market. That has and will con-tinue to push some investors towards the private prod-uct, because they’re thinking: ‘well how liquid is the bond market anyway?’

Leighton, Great Portland Estates: It started out as a diversification drive — with the banks not wanting to lend and borrowers not sure that the market was going to be enough for them in the future. And it’s just spiralled, with the PP market becoming more used to providing funding to a variety of sectors. That’s meant more flexibility on, for example, currency.

Our first two issues were almost all in dollars. Nobody apart from Simon would give us any sterling.

The last two issues everyone’s given us sterling. The delayed draw options are now much greater than they were before. They can be secured, unsecured, rated, unrated. The public market is somewhat limited to benchmark size, whereas in PPs you can be really flex-

ible on sizes. There are all of these things meaning it’s appealing to issuers.

: Does this explain why UK borrowers have tended to stick to US private placements rather than go to the Schuldschein, as so many other European borrowers have?

Leighton, Great Portland Estates: Our banks have never brought us Schuldschein when we bring them in to talk about our funding needs and markets we could access. It’s never been mentioned by them. I don’t know much about the Schuldschein market. I believe it to be quite covenant-light in structure. Personally, I’m quite happy to have some covenants if it saves me on the margin. So it wouldn’t be the first place I would look, although that is based on very limited information.

: Inês, has anyone been knocking on your door with a Schuldschein?

Faden, Tideway: No, but we have a constraint because during the construction we have a government sup-port package, so we have limitations on how much we can do with derivatives. So we really have restricted ourselves to sterling lenders — we have limited pocket money for things like swaps.

Merkofer, UniCredit: We are not active in the US PP market, as we offer the Schuldschein and Euro PP. Whenever we hear ‘issuers are not active in those two products, they’re looking at going into the US PP mar-ket’ it is mostly because of maturity. The long maturities you get in US PP are not usually on offer in the other Euro PP and Schuldschein markets.

: How damaging was the Carillion default to the furthering of the Schuldschein mar-ket in the UK?

Boehmer, Helaba: I don’t think there was any knock-

Inês Faden da Silva Tideway



44 Private debt

on effect on the Schuldschein product in general — and if there was, it should have happened to the US PP as well, because Carillion had US PP debt.

Going back to why the Schuldschein is not offered to some borrowers, or in some jurisdictions, it is because of the banks that operate in those markets.

UK and US banks tend not to run around offering Schuldschein products. They tend to be established US PP players and as a result, they offer US PPs, which means the product is very established in those markets, such as the UK. Fretwell, M&G: Carillion was a little different, coming back to the point about traditional and international investor bases. Carillion was bought by the international investor base, so it didn’t poison the Schuldschein mar-ket’s traditional investor base. You could say: ‘well, it was just one of these deals’.

Steinhoff would probably be a little harder to explain to clients, but Carillion seemed to be just one of those unlucky episodes.

Boehmer, Helaba: Nowadays we see 150 deals a year in the Schuldschein market. This means that over five or six years you are going to see 500 or 700 deals and there is bound to be a default in there somewhere.

: It’s a credit market, it’s going to happen. But the second part of the question is: do you see the UK as a promising market?

Boehmer, Helaba: I still haven’t given up hope on it! I would also love to see the UK banks entering the market and promoting the product. We have seen tremendous traction in France in recent times, where we have done four or five Schuldscheine in the last six months. Mean-while, the Nordics are quite strong and the Benelux is there too. Of course the currency in the UK is different, which might explain it partly, but that shouldn’t be too big an issue.

: We all agree that the US PP and Schul-dschein have performed very well in the post-crisis years. Of course, in that time financial markets have been supported by extraordinary monetary policy measures. A vast amount of liquidity has been pumped into markets, including corporate credit. So what’s going to happen to private debt markets over the next year or so, as special measures end?

Al-Jaafari, RBI: While there has been a fair amount of volatility in the public bond markets, especially at the end of last year and the beginning of this, the Schuld-schein market has pretty much carried on regardless. Investors are still very liquid.

One other important point is that the Schuldschein investor does not mark its portfolio to market. It’s a buy-and-hold-to-maturity market, where the asset is issued at par and held at par. That gives us a competitive advantage over public bonds and other public placement products.

Boehmer, Helaba: Regarding the impact of the end of quantitative easing, we think it’s really driven by issu-ers’ demand — which itself is a product of a well func-

tioning economy. So as long as the economy’s growing and, for example, there’s M&A activity, we believe the markets will stay strong.

Macaulay, MIM: The US PP market’s been proven to be pretty resilient through the ups and downs of economic cycles. And if anything, as an insurance company, if you’re worried about where the economy’s going you may actually position yourself into private placements and away from other asset classes, because of the down-side protection.

So US PP demand will likely remain pretty strong, and that counter-cyclicality should help support it. And then the question is — what about supply and whether issu-ers are looking to issue, if rates are rising, for example?

Fretwell, M&G: Quantitative easing is way above my paygrade. So I have no idea how it will pan out. But there is an institutional base who’ve got to invest this money. And private placements, relative to the public markets and the loan market, are small in comparison.

So we, in a way, are infill and the reason we’re infill is because we have flexibility. So, like Ewan, I’m hope-ful there will still be a clear need for private placements.

Our pricing expectations may change going forwards. Ewan mentioned the illiquidity premium. That varies, depending on how aggressive the market is and where we see ourselves in the cycle.

The one constant, and I like to talk about it every year, is that in private placements we’ve learnt from the downturn — we have to have financial protections and that’s something we won’t give up. It’s a very orderly market in that sense.

: Martin, is the loan product coming back as a financing tool in any way?

Leighton, Great Portland Estates: Just not seeing it. I received a market update email from a bank a couple of days ago, talking about the public versus the private market. It said for the public market, on the new issue front, renewed volatility had taken its toll on investor sentiment. Some upward pressure on new issue premi-ums, the market was noticeably weaker, and undoubt-edly more cautious. A number of issuers stood down.

Then it talked about the private market. As usual, US PP investors remained disconnected from, albeit not

Heiner Boehmer Helaba



Private debt 45

oblivious to, the day-to-day volatility in broader mar-kets. Very diplomatic.

Investors have plenty of cash to put to work, lead-ing to very efficient execution and impressive pricing outcomes. We see that continuing. At the moment, the PP market is extremely strong. We certainly don’t see it falling away, the way we’ve seen the other markets do.

Fretwell, M&G: It’s a bit like the game where you drop the rat down the pipe and you have to hit it when it comes out the other end.

In the public market it’s an opaque pipe, you really don’t know when it — the deal — is going to come out and you have to try and hit it. And it’s really hard to time it properly. Whereas the private placement market is a transparent pipe. You know the deal’s coming, you can see when it’s coming, and you can act accordingly.

Unless there is a big disconnect in the market, we will not, just because the market’s got a little bit of volatility on the day we decide to price, pull a deal and say, ‘well, that was that’, as seems to happen in the public market.

We can do that, because again we are not the bulk of the market. The majority of the deals in our investor’s portfolios are going to be publics.

And we have other protections as well, as Ewan said. It is not as simple as purely the price, there is a little bit of squidginess in our willingness to invest.

Macaulay, MIM: The other thing that helps is that our mandate is not necessarily to outperform an index — we’re not trying to dip in and out of a market. We are there as a buy-and-hold investor matching assets and liabilities.

So you’ve got the luxury as an investor to look through shorter term volatility. Now of course you are still looking at the longer term prospects. You’re not completely disconnected from what’s going on in the broader world. But you’re thinking more about ‘will this investment pay me back in 10 years’ time?’

It doesn’t really matter whether it’s going to go up or down in terms of value, that doesn’t really concern us, because we’re buying and holding. So it’s a better posi-tion to be in.

Faden, Tideway: From an issuer perspective, the appeal of the private market was that we also had some debt certainty, we had visibility. And for our board, given that we had to issue a lot very quickly from virtually nothing — we had the equity, we had the big RCF but nothing else — there was not a great appetite to get into the public market. It was much better to start with a few private placements, establishing the reputation, estab-lishing the credit level. And then only after 18 months we moved to public markets.

Boehmer, Helaba: I just want to flip the question of why certain products work and don’t work in certain jurisdictions. Given how well the US PP product works in the UK, why doesn’t it work on a similar basis, for example, in Germany?

Fretwell, M&G: If you look at the issuance since the last downturn, say 2011-13, there was a significant volume out of Germany and the Netherlands, and they have both since retreated. The UK, meanwhile, has been con-

stant, just under or just over a fifth of the total issuance. We occasionally get a large French issuer, then noth-

ing — we just haven’t seen consistent issuance from continental Europe. It used to be double the sub-10% of the total market that it is today.

And my guess, talking to people, is the strength of the banks. Corporates are getting the capital they need at a price they’re happy with. They do give a bit away in terms of maturity, but they’re very happy with the banking relationships they’ve got.

I don’t think that’s entirely the case in the UK. So I would say it is a difference in the structure of the bank-ing markets in continental Europe versus the UK.

But you’re right, where are the continental issuers? We’ve seen quite a few out of Spain and Italy, places like that, but not the traditional German issuance.

Al-Jaafari, RBI: If you carve out the blue chip corpo-rates in Germany, let’s say the public ones, you are left with typically very strong mid-cap German corpo-rates, which prefer to consider a Schuldschein issuance rather than a bond, where they have, for instance, to provide a prospectus. So the Schuldschein gives them the comfort to issue transactions with less transparency than the US PP market. The Schuldschein market tends to be more covenant-light for strong corporate credits.

Fretwell, M&G: That’s true, but that was also the case before the financial crisis. There has been a change that the German corporates just haven’t come to our market. As I say, I think it’s the banking sector in Europe, and particularly Germany, that is causing this.

Macaulay, MIM: Well it’s competition, isn’t it? It’s com-peting products and a lot of liquidity. So issuers have lots of options. Having said all that, Simon’s right, the US PP market has seen a decrease in volume from conti-nental Europe, over a five year period. But over the last 12-18 months it’s started to rebound somewhat. Perhaps not back to where it was in 2011 or 2012, but it is start-ing to come back.

You’re starting to see issuers that maybe have Schuld-scheine and US PPs, for example, and they’re looking at both products and saying, ‘OK, if I want seven year euros I’ll do a Schuldschein, but if I want 15 or 20 years in dol-lars then US PP is my natural home’. Some issuers are becoming more sophisticated and going down both paths.

Simon Fretwell M&G Investments



46 Private debt

And indeed, some issuers have been to the Schuld-schein and US PP markets more or less in parallel, to cover off different maturities. So that may well be the way the market evolves over time.

: Inês, you’ve used delayed draws in your transactions — some people felt you pushed the market quite hard in getting them. Does this represent a secular shift in the market?

Faden, Tideway: It is something others have done. But we found that the investors really wanted to have this paper, and maybe for some of them there were win-dows of opportunity. We have a finite amount of debt to issue and they wanted a piece of it, so they were will-ing to accept the deferral.

But because of this long term view, this buy-and-hold, and the matching of liabilities, they have a lot of vis-ibility into the future. So in the same way that we have — we are building this tunnel, we need money in four years’ time — they have the visibility of their liabilities and know when they need to place money.

Merkofer, UniCredit: How does pricing work for these deferral periods?

Faden, Tideway: That is an interesting discussion. At the end of the day we look at the all-in price — a mar-gin over Gilts and also the coupon. Investors will want

to price in several components, including the defer-ral, the inflation-linked element and, for CPI issuance, also the wedge between RPI and CPI. We have found that investors will have different views on the various pricing components, so it’s difficult to put a price on deferral. But it has come down — the premium we paid for deferral has come down from when we first issued almost three years ago.

: Have you brought it down lower than some expected?

Faden, Tideway: Yes. And the comparison with some of the public side pricing is interesting. Last year we issued a private MTN, one of the CPI inflation-linked deals, at 245bp over Gilts. That includes the ‘wedge’ between RPI-linked and CPI-linked bonds, which might have

been 80bp or 100bp. The bond also had a four year deferral.

Our public bond, which has a shorter maturity, was trading at the time at about 130bp. So we got very compressed terms on the deferral. But I think the inves-tor had the exact place to put the debt and they were happy.

: Is this a technique that the Schuldschein market would consider adopting?

Boehmer, Helaba: We do see delayed drawdowns in Schuldscheine, but for weeks or months, not years. A lot of the investors are banks, and with delayed draw-downs you have capital requirements and that costs money, and therefore it is difficult for them.

: How happy are US PP investors with such long delay periods as Inês managed to secure?

Macaulay, MIM: One of the reasons deferrals are grow-ing is that it doesn’t really cost investors much. The opportunity cost is relatively low. We would often look out at the forward curve and ask ‘what should we be getting in compensation for this?’

The forward curve is very flat at the moment, which means it’s very cheap, so that works for both the issuer and the investor. So we’re not requiring too much com-pensation.

Now, of course, that may and probably will change at some point. So deferrals may not be a permanent feature — we shall see. But I think it is also an example of the private placement market trying to innovate and remain flexible and relevant to issuers.

Merkofer, UniCredit: And it’s guaranteed that you will be the investor when it comes to a drawdown?

Macaulay, MIM: Yes, you’re committing to it as of today, committing to funding within the agreed time-frame. Everyone’s got the certainty.

Fretwell, M&G: We’ve got very low interest rates at the moment. Will they go on forever? If you don’t believe they will, you should do a forward funding now.

And a lesson from history: we’ve had a number of issuers historically, who’ve got coupons of say 6% or 8%, and when rates went down they weren’t thinking, ‘Oh didn’t we do well because we had a forward fund-ing?’

So it just depends where you start from. With rates where they are, why wouldn’t you do a forward fund-ing if you can get away with it? Because they can’t go much lower.

Faden, Thames Tideway: We’ve been saying that for a couple of years. But if you wanted to raise RPI-linked debt today it would be really difficult. We would have to price RPI at minus 50bp-70bp. And although we priced one of our deals a bit below zero if we adjusted the price, when you get to minus 50bp-70bp most investors are not prepared to do it.

Fretwell, M&G: Yes. It’s one of the interesting things about pricing if coupons are negative.

Konrad Merkofer UniCredit



Private debt 47

: You hinted, Simon, that delayed draws might not be around when rates start to go up again. Is that your view?

Fretwell, M&G: We’re in an abnormal market at the moment in terms of interest rates. It’s abnormal as well in the sense that corporates know what their funding requirements are. While we’ve had a bit of M&A, it’s been flat for six or seven years — and it’s only about half the level it was before the downturn. Corporates just aren’t functioning normally. They’re borrowing to do some refinancing, which is not really investment. Mid-markets aren’t doing acquisitions either. They’re gearing up to pay out dividends and shareholder returns. So it’s an abnormal market. Brexit has hardly made it easier.

Investors can only do a certain amount of forward funding, as well. It can only be a minority of their book, because they also don’t know what their liabilities are going to be. Quite a lot depends on what insurance products they sell. You tell your insurance sales force, ‘you need to sell this so customers get a rate of 5%, and then we on the investment side, we will achieve the 5% for you’. So it’s useful for some, but it’s not going to be the main meal.

: Simon, you win the booby prize for mentioning Brexit first. But Martin, how has the lack of certainty affected you as a UK issuer?

Leighton, Great Portland Estates: We’ve not wanted to issue around the times of maximum Brexit uncertainty, but you just get to the point where you have to issue. So there have been US PP deals done in the real estate sector, right at times of really peak uncertainty.

At some point clearly it’s going to have some kind of concrete impact. But for now it’s just very difficult to plan around it.

In the UK real estate sector, there have been nine US PP issues over the last 12 months, and only two in the public market. And none in the public market since October. So if peak Brexit uncertainty has been over the last seven or eight months, the PP market is still going strong.

There’s obviously a limit to how much the PP inves-tors can look through these major macro events. But the message still remains remarkably constant. It’s almost business as usual.

Fretwell, M&G: We actually priced five deals in Decem-ber. It was a strange month because the public markets gapped out, big time. And we had a Brexit date, I can’t even remember which one and why it was important, but there was a date when we thought the markets might be very volatile, or that we wouldn’t actually be able to get a Gilt price. But we priced five deals with no problem at all.

It was exceptionally busy for us. As Martin says, we just carry on. We’ve got to be pragmatic. It’s differ-ent from the public markets, we’re not knee-jerk. It’s not the price that came up on your screen at 9.30am and then ‘do we go or not go?’ We have deals. We’ve worked on them. We think they’re good, long term investments, and we carry through.

And as Martin says, we just don’t know what’s going to happen. We assume the world is going to continue to turn, and we operate on that basis, and I think our portfolio managers think likewise. They’re the ones who make the investment decisions, we give advice on the credit.. Leighton, Great Portland Estates: And actually, there was such a number of deals being pulled forward from, say, March 2019 back into December last year, to avoid what was thought to be the key Brexit date.

: It’s a slightly theoretical question, but would a UK issuer manage to sell a Schuldschein to the German market right now, given the uncertainty Brexit is creating?

Merkofer, UniCredit: The only thing we’ve seen on the private placement side since the referendum is that certain funds in Europe can only invest in the European Union, according to their mandates.

They’ve obviously stopped buying UK names, but that has happened very soon after the referendum.

Also it’s probably not very smart to launch a UK name on a day when you have high Brexit volatility. Boehmer, Helaba: First of all, we would sell it to the international investor base. So yes, I think it’s feasible. We’re just at this moment discussing one.

But of course there are other things to think about. We were recently talking to a French issuer who said he didn’t want to have UK investors in his book. I don’t know what his motivation was, but he didn’t want the complication Brexit would bring. Perhaps he didn’t want to have to explain the presence of UK investors to his board, or to whomever.

So it makes life a bit more complicated, but I still believe it would be feasible, yes. Al-Jaafari, RBI: Why should it be difficult? We are now seeing Asian borrowers issuing Schuldscheine. We are talking about the UK, a European country with solid corporates.

Why should we challenge if they can place or not? The only thing I’m afraid of is that maybe the media and politicians make it out as a big story, and then investor behaviour might be affected.

Spain, Italy are also good countries in terms of cor-porates who can tap Schuldschein markets. Why should we be afraid of UK corporates?

Merkofer, UniCredit: There are a couple of Spanish deals in the market at the moment, so yes.

: The US PP market and the Schuldschein have different systems of credit rating, or credit analysis, in the shape of the NAIC ratings for US PPs and the ratings provided by Landesbanks to savings banks in the Schuldschein market. How important are these systems, and do they need reform?

Macaulay, MIM: Talking for the US PP market, the system’s been in place for many a year. US private placement investors are used to it and it seems to function fine, from what I can tell. So I don’t see any



48 Private debt

great need for change. It’s like anything in the finan-cial industry — there’s regulation, and people just get on with it.

: There has been discussion over whether the NAIC capital weight buckets could change, to encourage more lower grade issuers to raise US PPs — to lessen the cliff effect between solid investment grade and marginal or sub-investment grade. Has there been any news or development around that?

Macaulay, MIM: There’s been some talk as you say, but nothing’s come into play yet. I guess time will tell.

: OK, so swapping over to the Schuldschein, is the system working?

Boehmer, Helaba: Yes, although you should take out the comment about Landesbanks providing some kind of rating that everyone relies on. All the investors do their own credit work. Full stop.

: It sounds great, but is that efficient?

Boehmer, Helaba: The Schuldschein needs a certain amount of time between the launch and close, which is typically five or six weeks. Technology will help because information will be more easily accessible and communication between investors and issuers will be more transparent and faster. So we believe timings will shorten a bit, but will never be three days. It will maybe be cut by one or two weeks over time. But it’s on the basis that everyone does their own credit assessment.

Fretwell, M&G: NAIC ratings are given after the deal is done, so they cannot be part of an investment deci-sion. And the NAIC has changed anyway because it was understaffed and had a lot of credit work to do. It didn’t necessarily work as efficiently as some of the US institu-tions would have liked, so the NAIC decided to accept private letter ratings. Which is an element that the investors can influence, through their choice of rating agency, that they weren’t able to beforehand.

Macaulay, MIM: Yes — to the question how would you grow the low triple-B space, one area that has allowed it to grow is these private letter ratings. People are able to get past the capital charge concerns they would other-wise have had.

Leighton, Great Portland Estates: The NAIC feels like a pretty blunt tool to me. We don’t really know how it works. It’s highly opaque. Investors, other than from the capital allocation perspective, don’t seem to pay much attention to what they say anyway. And it’s not particularly relevant to us, frankly.

: Can these different private placement markets learn from each other about how to attract new issuers or investors?

Fretwell, M&G: We could offer you documentation. We’ve got more pages than you do!

Al-Jaafari, RBI: And the covenants as well!

Faden, Tideway: That is one. The US PP market takes a little bit of getting used to. Once you do one, I can imagine that then it’s easy, but the first time, for some-one coming from a different market, it can be quite complicated and different.

: That is what they say — it’s tough the first time round, but as part of that process, you’ve won the loyalty of investors and they have got to know you properly. In return they stick with you through good times and bad. By and large is that true?

Faden, Tideway: Well, we’ve only done one, but we have seen continued investor interest from the market, so I would say yes.

Macaulay, MIM: Yes, that’s true. A lot of what we do is repeat business. We try and position ourselves as a rela-tionship investor.

And you’re right, for the issuer there’s the learning curve in terms of documentation, but once you’re up that curve it is a lot easier just to reissue using much the same documents. So it does become a lot more efficient the second time round.

Faden, Tideway: Like us, a lot of UK utility finance is structured as whole business securitizations. So we have a common terms agreement that you have to overlay on the US PP documentation. But because investors have done this for quite a while there is knowledge in the market. So we didn’t find it that difficult, because others had been there before us.

Leighton, Great Portland Estates: The number of lawyers working in this space seems to be very small, which could be a disadvantage, but actually it works quite well. It means if you have a question on your covenant structure or anything else in the documen-tation, the lawyer who’s advising you has probably done a third or half the deals in recent years anyway, and almost knows what you’re going to say before you say it.

So even if it is your first deal, there’s quite a lot of

Ewan Macaulay MetLife Investment Management



Private debt 49

hand holding you can have.

: One of the downsides of the Schuldschein is that in the event of some sort of credit issue, when it comes to a restructuring, it can get very complicated because every single inves-tor has as much right as anyone else, and you have to deal with them all separately. This might be 130 institutions who probably won’t co-ordinate with each other, or don’t have to. Is this something that can be worked on? Or would that change the essen-tial character of the Schuldschein?

Boehmer, Helaba: The LMA standard hasn’t addressed that. But this hasn’t stopped the market so far, so I don’t know if it is a big issue or not.

Fretwell, M&G: To be fair to the Schuldschein market, you do have a kind of lead bank that will direct the investors. So there is some kind of informal syndication. One of the criticisms of the US PP market is that you’ve got a whole bunch of investors and they are all separate. We don’t have a lead, we don’t have a syndi-cate, and we have to self-organise, generally with the help of a lawyer. But it hasn’t proved to be too much of a problem in recent years —investors seem to get on with it.

: We’ll see at some stage whether it does work properly, because eventually the cycle will turn. We’ve seen a massive increase in, for example, Schuldschein volumes over the last five or six years. There are bound to be blow-ups and it will be inter-esting to see how the market copes.

Fretwell, M&G: Not having financial covenants makes it a lot easier. Those deals require fewer amendments!

: How about the outlook? Can we expect the markets to keep growing, as they have done over the past three years?

Merkofer, UniCredit: Private debt in general will grow, as long as rates stay low. Maybe bank financing will be less plentiful available. And investors are looking for yield. So yes, I’m very positive, as long as rates stay as low as they are now.

Boehmer, Helaba: One reason why I believe the mar-ket will continue to grow is that new banks have joined the club to promote the product. For example, in the last one or two years you have seen Nordic banks such as SEB arranging deals, as well as Dutch banks such as ING. The hurdle for entry is fairly low.

Al-Jaafari, RBI: I agree. We saw a record year in 2017 with €30bn. This year to date, we are already at €11bn. Meanwhile, the leading banks have a pipeline of between three to five transactions each, and investor appetite remains strong, so the prospects are good.

Whether we will see the €30bn again, it is too early to say. But we are seeing new borrowers from Asia, for example, entering the market, which definitely boosts its image.

: Reliance, from India?

Al-Jaafari, RBI: Tianjin Rail Transit Group Co has become the first Chinese Schuldschein issuer, marking another step in the Germany-centreed debt market’s global expansion.

: And what about US private placements? Are you positive on the outlook for this market?

Fretwell, M&G: Yes. Our main competition is the lend-ing banks. They’re not getting any stronger. They’re not getting any more motivated to go back to being the main lenders to corporates.

They’re getting a lot more focused on capital efficien-cy. So that’ll be good.

And then what’s happened is that slowly more sec-tors have come to the market — a few years ago we didn’t really have housing associations, universities and schools. Now, they’re established and investors are get-ting comfortable with them.

Meanwhile, look at the average length of US PPs — it’s still between seven and 10 years. This means that, because 70%-80% of the market is repeat business, you have got a natural renewal base of, say, 13% a year. So it’s slowly accreting.

Macaulay, MIM: New verticals are definitely opening up and investors are interested in new areas. Simon touched on some, such as education, but we’re also see-ing a bit more in the aviation space. A bit around sports financing as well. These have all been quite strong areas in the US. Investors are interested in these newer areas, maybe even local authorities. We’ve not seen anything yet, but who knows? Maybe that could be an area that takes off.

Fretwell, M&G: The Public Works Loans Board is the immediate block to more council issuance. At the moment, councils get excellent rates from the PWLB. We already do business with them on the real estate side — we do deals with councils, just as we do with the universities on a real estate basis, where we have them as tenants.

We can structure deals like that so that they don’t have to borrow directly. But direct to a council — I think that’s a big step away.

Faden, Tideway: One other factor to consider is the withdrawal of the European Investment Bank. From 2016 to 2017, lending to the UK fell very sharply, by 70%, and they have virtually stopped since. And of course they operated in some of these sectors, such as infrastructure, universities and housing. I think the EIB had lent £5bn to universities in the four or five years before the referendum.

Fretwell, M&G: One thing we haven’t touched on is how private placements have worked well in regulated markets, such as utilities. However, this could all change if there is a step change in regulation, which could come about with a change in government. It’s a focus for us, as, being a UK institution, we have exposure on the public side. s



US PP AND BREXIT

THE SCHULDSCHEIN market isn’t the only market breaking records for European private debt.

In the US private placement mar-ket, UK issuers made up more than a fifth of borrowing last year, with roughly $15.1bn of issuance, accord-ing to Barclays data. Some claim that was its highest proportion ever.

“US PP investors from Canada and the US are growing more and more accustomed to analysing UK and European borrowers, and see them as an important source of diversifi-cation away from North America,” says an investor at a US institution.

Last year’s UK volume was bol-stered by a clutch of large transac-tions, bought by investors in Cana-da, the US and the UK.

Thames Water was one of the bor-rowers, when it priced the largest UK private placement of the first quarter of 2018. It was a dual currency trans-action, $340m and £346m, sold to investors based in the US, said a US PP banker.

Brookfield Utilities and Scotia Gas Networks also raised £300m each last year, according to a US PP inves-tor, while Northern Gas Networks sold £200m of 10 and 12 year notes in October.

“It’s clear that PP investors are not shying away from UK issuers, even with the uncertainty around Brexit. This is a good sign for other UK issu-ers thinking of accessing the market in 2019 and beyond,” says a UK pri-vate debt agent in London. “The PP investors are interested in long term credit analysis and don’t have to mark to market, so short term vola-tility really doesn’t affect them.”

A PP investor in London says: “Brexit has had a direct impact only for a very few sectors and compa-nies. For most of our clients and most industries, the impact is mini-mal… There are some companies which have genuine trading expo-

sure and supply chain risk, and less sophisticated hedging, but we haven’t seen any real impact. Some companies that were going to under-perform have been using it as an excuse.”

Bullish despite BrexitThis bullish confidence in UK cred-its was on particularly clear display when Tritax Big Box, the London-listed industrial real estate invest-ment trust, raised £400m of 10 and 12 year US private placement notes last November.

Agents NatWest Markets and San-tander priced the deal on the day that the then Brexit secretary Domi-nic Raab and work and pensions sec-retary Esther McVey resigned from

the government, due to their inabil-ity to support then prime minister Theresa May's proposed exit agree-ment with the EU.

A US PP investor, who participat-ed in the transaction, described the situation at the time. “We were look-ing at the headlines: two cabinet ministers went in quick succession. I was reporting back to my boss on the deal, saying things would be OK — then we priced the transaction and the next day everyone moved on.”

Tritax’s £250m February 2028 notes had a fixed coupon of 2.86%, while the £150m February 2030

notes were sold at 2.98%. According to one agent, those were the same coupons it would have obtained two weeks earlier.

In contrast, in the public bond market, TSB Bank was forced to pull a prospective covered bond issue that day, while Volkswagen had to pay elevated new issue concessions to access the sterling bond market.

US PP participants are expecting further sterling dealflow, as a conse-quence of Brexit volatility disrupting public bond markets.

One US PP investor, who takes particular pride in the stability and steadfastness of his market, says: “Look at 2008 — when public mar-kets shut, the US PP market stayed open.”

In times of market turmoil, PPs are often the most stress-free way to raise debt. Investors do not mark securities to market, so are not preoccupied by volatile credit spreads.

The rationale of a US PP inves-tor was explained by one practition-er like this: “If you are a good credit before market problems, you’ll likely be a good credit after, too.”

Specialists are confident many issuers will get a good hearing in the PP market, despite the serious threat of a breakdown in Brexit talks.

Cadent Gas, G4S, Rolls-Royce, SSP and Wood Group are among a host of UK issuers that have issued ster-ling US private placements this year, without having had to pay new issue premiums.

“If you are a regular corporate issuer in both public and private markets and you’re looking for debt, US PP investors will take a less dra-matic position about the risk around Brexit — so you’d go with private because we’re more stable,” says a second US PP investor. “We’re strong and stable — I’ve heard that phrase before.” s

The US private placement market has carved itself quite a following among borrowers in the UK and Europe, with its enticing offer of long dated debt at tight margins. But since Britain voted to leave the European Union, agents are playing on another of the market’s strengths — its resilience to external shocks. Silas Brown investigates.

US PP market swells amid Brexit uncertainty

Thames Water: one of the UK’s stable of utility US PP issuers

050_US PP and Brexit.indd 50 11/06/2019 18:44


US PP AND UK LOCAL AUTHORITIES

FOR MANY years, UK local authorities have been almost entirely absent from institu-tional debt markets, mostly because of legal constraints and the cheap funding they receive from central government. But change is afoot, and the pos-sibility that councils will raise debt from private investors is growing.

The US private placement market welcomes this prospect. “The right UK local authorities are a clear fit for the PP buyers,” says an investor at a US institu-tion. “Solid credit metrics with business strategies we under-stand, and in need of long dated cash.”

One such issuer is the City of Lon-don. Lloyds Bank and Santander have been mandated to raise private debt for it, according to several mar-ket sources, with the deal scheduled to take place in mid-June.

Though the money is not ear-marked for a specific project, the Corporation wants to raise £3.4bn ($4.2bn) in the next few years to finance several infrastructure pro-jects, including relocating the Muse-um of London, refurbishing the historic Guildhall, and moving Lon-don’s three wholesale food markets — Billingsgate, Smithfield and Spi-talfields — to a new site in Dagen-ham, Essex.

The Corporation includes the City Fund, the arm responsible for local authority financing, and the City’s Cash, the Corporation’s endowment arm. The City Fund will borrow from the Public Works Loans Board, the arm of the national Treasury that lends to local authorities. The City’s Cash will tap the US PP market.

The tenors of the PP transaction will be fixed during the marketing process, but are likely to be between 10 and 30 years. The amount is also not yet fixed, though one market

source said he thought it would be £200m-£300m.

“We’ll see about the specifics when the banks begin marketing,” says an agent in London. “But what I can say is that if this goes well, this won’t be the last local authority to look at private debt.”

Pricing is the issueAccording to several market sourc-es, Birmingham City Council, the Greater London Authority and Ports-mouth City Council have held dis-cussions with market participants in the last 18 months.

However, there has always been a barrier: the PWLB, which falls under the responsibility of the UK Debt Management Office. It provides 70% of councils’ debt, and lends at attrac-tive rates — at present, 80bp over Gilts.

Up to now, institutional investors have not been willing to price loans to councils more tightly than that.

For example, according to an investor, Birmingham City Council approached US PP investors in 2018, but found the price it could get from the market was much higher than that on PWLB loans. “Everything made sense — credit quality, risk

and maturity — until it came to the price,” says the investor.

“It would be a tall order for PP investors to get to that price, unless the local bor-rower was an incred-ibly strong credit,” added the investor. He said his institu-tion priced debt for UK universities in the low 100bp area and for private schools in the mid-100s, so councils would be

likely priced in that region.

However, those hoping to see more of such lending have some grounds for optimism. Last October, the then UK prime minister There-sa May said housing was the largest domestic policy challenge.

To help address it, she said the government would remove caps pre-venting local councils from borrow-ing above certain levels against their housing revenue accounts (HRAs), in which they keep income from ten-ant rents and services.

“There are a few ifs, but that change could really bolster the chances of financing by the US PP market,” said a US PP agent. “We’re ready for the challenge. We’ve been analysing UK housing and education for some time, which aren’t dissimi-lar credits.”

Another PP investor, who says he has been keen on UK council fund-ing for a long time, says: “What we need is one headline deal for other councils to notice of US PPs as a via-ble funding alternative, but also for North American investors to take this growth prospect seriously.”

The City of London, despite the borrowing being done by its endow-ment fund, might just be that head-line deal. s

The City of London Corporation, via its endowment fund the City’s Cash, is set to enter the US private placement market for the first time. While UK councils are still a rare sight in the US PP market, agents believe they may be a fruitful asset class for the future. Silas Brown reports.

City of London sparks PP interest in UK councils

The City of London is looking to blaze a trail into the private debt markets. Other UK local authorities may follow

051_PD_US PP and local.indd 51 11/06/2019 18:45

Values with impact.

What helps you get ahead? Expertise you can trust.Are you looking for more fi nancing fl exibility through the use of Schuldschein loans? Then you can count on our competent and personal approach. The long-standing trust of our customers has helped make us one of the market leaders in this sector. And now we have added a new digital service: together with our partner vc trade (www.vc-trade.de), we can offer execution via a digital Schuldschein platform. Now you can count on even more transparency, effi ciency – and speed – for your transaction.

SSD 2023/2025

$ 100 m

Sole-Lead

SSD 2025/2028

€ 90 m

Joint-Lead

SSD 2028

€ 100 m

Sole-Lead

SSD 2023/2025/2028

€ 120 m

Joint-Lead

SSD 2023/2025

€ 60 m

Sole-Lead

SSD 2025

€ 200 m

Sole-Lead

SSD 2023/2025/2028

€ 120 m

Joint-Lead

SSD 2022/2023

€ 75 m

Sole-Lead

SSD 2021/2023

€ 100 m

Joint-Lead

SSD 2023/2025

€ 200 m

Joint-Lead

SSD 2025

€ 150 m

Sole-Lead

SSD 2021/2023/2025

€ 154.5 m$ 68 m

Joint-Lead

SSD 2020/2022/2023

€ 500 m

Joint-Lead

SSD 2022/2024/2025/2028

€ 205 m$ 295.5 m

Joint-Lead

SSD 2023/2025

€ 150 m

Sole-Lead

SSD 2023/2025

€ 195 m

Joint-Lead

SSD 2021/2023/2025/2028

€ 80 m

Joint-Lead

SSD 2024/2025

€ 400 m

Joint-Lead

SSD 2023/2025

€ 100 m

Joint-Lead

SSD 2022/2023/2024

€ 497.5 m$ 230.5 m

Joint-Lead

2019033806_Tombstone_Schuldschein_EN_Global_Capital_210x297_DU2205_39L

2019033806_Tombstone_Schuldschein_EN_Global_Capital_210x297_DU2205_39L.indd 1 22.03.19 10:20

private debt · customised solutions for all issuer‘s needs. eur 600,000,000 1.625% senior bonds...

Documents