12 septembre 2019
Syndicated loans and corporate bonds are well-established and universally recognised financial instruments across the globe. The German-law governed 'Schuldscheindarlehen', on the other hand, which has its origins in the nineteenth century, is an instrument which was used for a long time only by 'blue-chip' companies in Germany.
In recent decades, the Schuldschein has been popular with German federal state banks (Landesbanken), allowing their savings banks to invest in corporate loans and public debt without having to dig deep into the world of syndicated loans.
However, times have changed. German banks are now offering these instruments to typical German midcap market companies (Mittelstanden) provided they are of sufficient creditworthiness.
The Schuldscheindarlehen now attracts issuers and investors from countries across Europe and the whole world, for example Asian banks and US funds. Demand has been constantly increasing and consequently, the LMA created a standardised bilingual (English/German) template and user guide for Schuldscheindarlehen in 2018.
However, an increased number of issuers from outside the DACH region have entered into the market in the past few years. In 2018, one third of the market's total volume was issued by non-German companies; in 2019 to date, foreign company issues have increased to a half of the market share. This year, Reliance Industries, an Indian conglomerate engaged in energy and petrochemicals, issued a EUR 450,000,000 loan note. However, most non-German issuers are still from Europe: Belgium, France, Switzerland and Scandinavia.
Schuldscheindarlehen generally have a minimum quantum of ten thousand EUR; maximum volumes are around one billion EUR or more. They are not separately codified under German law. From a German law perspective, they are loans combined with promissory notes and can be issued secured or unsecured.
In the market, they are mostly issued unsecured, but with the benefit of a guarantee. Terms resemble syndicated LMA documentation and include representations, financial covenants, general undertakings, information undertakings and events of default. However, the array of covenants and events of default is less comprehensive than one would find in a typical syndicated loan. Where regulation is concerned, they are treated as loans.
A Schuldscheindarlehen is a German law-governed debt instrument, which combines the features of a simple loan with certain elements of a bond. It is exclusively denominated and issued in euros and divided into different, legally independent loan notes.
Each investor acquires a single loan note which constitutes a single legal contract between issuer and investor. Such loan note is documented separately, but contains near-identical provisions to the other investors' notes. As a consequence, each investor can exercise its rights independently. There is no joint acceleration mechanism.
Tranches of loan notes have standardised terms with the same maturity dates. Each Schuldschein is most commonly divided into different sets of tranches with fixed or floating interest rates and different maturities (eg seven years fixed/floating and ten years fixed/floating) very similar to a US private placement.
There is usually a financial institution appointed as a paying agent, rather than a facility agent. The paying agent's rights and obligations are documented separately in a bilateral agreement with the issuer. The paying agent's most important function is to coordinate the forward flow of funds between investors and the issuer.
In comparison to corporate bonds and syndicated loans, a Schuldscheindarlehen has many advantages. Though Schuldscheindarlehen are not as fungible as corporate bonds, they are more fungible than syndicated loans. They are not traded on the stock exchange. They are traded over the counter (OTC) in the interbank market or over Fintech platforms.
Schuldscheindarlehen are transferred by assignments of the loan or by way of assumption of contract. There are no specific formal requirements for a transfer and transfers to other investors are not subject to the issuer's consent.
Another key advantage is that the process of a Schuldscheindarlehen from mandate to closing is very quick and simple. The documentation is not as complex as that of syndicated loans. Usually a Schuldschein is approximately 30 pages long. It follows that the transaction costs of a Schuldscheindarlehen are typically lower due to the high degree of standardisation.
Finally, external ratings and prospectus obligations are not required.
As a result of these features, Schuldscheindarlehen attract a wide range of investors eg financial institutions, funds, insurance companies and pension funds, and entities which do not usually participate in the syndicated loan markets.
Nevertheless, in a restructuring scenario, the bilateral nature of each tranche under a Schuldscheindarlehen turns into its biggest downside. The coordination of investors is very burdensome; and every single investor's consent must be obtained if an amendment of the loan notes is required.
There is no facility agent acting on behalf of the various investors seeking consent. The paying agent has a mere administrative function. Unlike syndicated loan arrangements, amendments or waivers by way of a majority decision of the creditors go against the grain of the Schuldschein.
Many banks and fintechs (eg Debtvision, VC Trade) have created blockchain-based digital platforms for launching and trading Schuldschein transactions, where the term sheet, invitation of investors, bookbuilding and the Schuldschein documentation can be shared with and executed by the different parties online. Independent providers have also entered the digital Schuldschein market. A digital platform further reduces transaction costs and accelerates the process of inviting investors and bookbuilding.
'Green' loan notes are another market development.
The purpose of such notes is sometimes limited to sustainable investments. In August 2019, Porsche AG issued a one billion EUR 'green' Schuldschein. It will be using the proceeds for researching, developing and producing electric cars and to invest in efficient factories that manufacture battery-run vehicles only. This was the biggest 'green' Schuldschein transaction in the market to date.
It is also possible to have the margin linked to sustainability criteria. However, no standard as to 'sustainability' or 'green criteria' has been established in the market as yet. Mechanical and plant engineering firm Dürr AG has issued a 200 million EUR Schuldschein in June 2019. The margin is linked to a sustainability rating provided by a third party agency.
Although no standardised market exists, it attracts many investors focusing on 'green' investments. Market share is still very low and niche. However, it remains to be seen whether a standardised market can be established. Watered-down sustainability and patchy sustainability criteria bear the risk of drowning the market for 'green' loan notes.