By Jörg Stührwohldt and Rudolf Bayer
As bond markets continue to labour in the face of negative rates and volatile macro-economics, alternative investment options have grown in popularity. Germany’s private placement market, the Schuldschein market, has been one of the principal beneficiaries of this – undergoing a surge of activity, with volumes rocketing to new highs.
Interest and activity in the market for Schuldscheine – the hybrid debt instrument at the heart of German private placement – is at an all-time high. Volumes rose to almost €24bn in November, making 2016 the market’s all-time record year.
These remarkable numbers are being driven in large part by a groundswell of interest among investors – with many seeing the Schuldschein as a way of diversifying their portfolios and achieving competitive yields against the backdrop of volatility and negative rates in the bond market. At the same time, private borrowers are lining up increasingly large issues in a bid to tap into investor demand and capitalise on the favourable environment.
The Schuldschein redemption
Certainly, the Schuldschein represents a compelling proposition for those seeking alternative investments. With bond markets racked by ongoing macroeconomic volatility and negative rates whittling away credit margins, many investors are looking elsewhere for greater stability and more favourable yields.
The Schuldschein offers a number of advantages in this respect. Chief among them is the facility for zero-floor language, which stipulates that if the Euribor or mid-swap rate drops below zero during the term of the contract, it will be considered to be zero for the purposes of setting the coupon. This guarantees that Schuldschein investors earn at least the offered credit margin on a contract, despite any negative rates that might otherwise apply.
In addition to shielding investors from negative rates, the Schuldschein brings greater diversity to investment portfolios; it also carries little risk thanks to an issuer base populated largely by investment-grade corporates from Germany and Austria, with little connection with the bond market. On top of this, the Schuldschein’s minimal and flexible bi-lateral documentation mean contracts can be tailored to suit both parties’ individual needs, while its exemption from normal mark-to-market reporting means any potential losses do not have to be reflected on the balance sheet.
With these benefits bringing new investors flocking to the market, Schuldschein issuers are seizing the opportunity to capitalise on the demand. Issue sizes have been rising across the board – with car rental and leasing company Sixt expanding an issuance to €350m in July, for example. At the top end, issues have grown a staggering amount, with car maker Porsche’s planned €200m issuance closing at €1.1bn in March – testament to the remarkable demand.
These figures are unsurprising given the opportunity for issuers to capitalise on the favourable conditions in the market – enabling them to access more capital at better rates than typically available.
A growing international presence
It’s an incentive that has prompted a rise in the number of international players issuing Schuldscheine. Whereas previous years have seen 80-90% of the market made up by German and Austrian issuers, this year, firms outside these German-speaking countries account for around a third of the total issuance volume. France alone accounts for around 10% of this year’s issuances, while other regions, such as Benelux, Iberia, the Nordics, and even non-European issuers, are also increasing in prominence.
Internationalisation is also rising among investors. Asian banks are among the more prominent newcomers – investing in larger ticket sizes, and typically demanding higher spreads in return – while institutional investors are also increasingly taking advantage of the opportunities to make stable investments, with favourable yields and access to a universe of credit and business profiles not available in the public bond market.
This growing interest on both the investor and issuer sides has spurred the Schuldschein to new heights in 2016. Indeed, the record volumes seen in 2008 and 2009 have been swept aside – propelling the Schuldschein to its biggest year on record.
Jörg Stührwohldt and Rudolf Bayer are managing directors at UniCredit
