Germany’s debt market pioneer at it again with technology push
Few people can claim to have created a new debt market. Andreas Petrie is one of them. And more than two decades after his breakthrough deal, he is once again pioneering a transformation.
Petrie wants to see Europe’s largest private debt market escape a tangled web of phone calls, e-mails and faxes by shifting to digital platforms within five years.
The technology drive is also a key part of efforts to expand so-called Schuldschein lending beyond the German heartland and into global markets. "The room for growth is huge," says Petrie, the Frankfurt-based head of primary markets at Landesbank Hessen-Thueringen, or Helaba. "The world is constantly moving towards a digital age, and we need to be creative."
Petrie’s original brain wave in 1996 was to introduce corporate borrowers to Schuldschein, a bond-loan hybrid then mainly used by European sovereign and financial institutions.
German banks led by Landesbank Baden-Wuerttemberg (LBBW), Helaba and Bayerische Landesbank have since built the idea into a market that reached record issuance of $40bn in 2017, before slowing in 2018.
Schuldschein currently offers more favourable terms than other financial instruments
Investors have flocked to a product offering comparatively high yields from generally investment-grade issuers, even after a couple of recent high-profile blow-ups. Borrowers appreciate a number of features: Schuldschein don’t need credit ratings; transaction details can remain private, unaffected by 2018’s stringent Markets in Financial Instruments Directive II; and paperwork is light.
"The beauty of Schuldschein is in its flexibility," says Paul Kuhn, head of debt capital markets origination at Bayerische Landesbank, or BayernLB. For closely held or unrated companies otherwise cut off from capital markets, the product is the best option, he says.
Like Helaba, BayernLB is working on digital Schuldschein using a platform called VC Trade, developed by fintech company Value Concepts. In April, Petrie’s team arranged the first Schuldschein on the platform, a green deal for Austrian power firm Verbund.
Helaba then worked with BayernLB on a sale for utility Entega. The system cuts processing costs as much as 30%, Petrie says, as it manages every step from syndication to issuance and trading.
The number of investors on the platform has swelled to more than 100 in just a few months and may double by year-end, says Value Concepts cofounder Sebastian Glock. "The platform is accessible to all investors and free for investors and issuers to use," he says.
Meanwhile, LBBW, the biggest Schuldschein arranger in 2017, set up a rival digital platform called Debtvision in partnership with the Stuttgart Stock Exchange. Marketing for the system’s first transaction, for logistics company BayWa, began in June.
LBBW is now focused on bringing more traffic to the platform. "We are open to share the platform with other banks, but we are not willing to dilute our quality standards," says Joachim Erdle, LBBW’s head of corporate finance.
Competition among VC Trade, Debtvision, HSBC Holdings’ Synd-X platform and possibly other systems may help accelerate the adoption of digital. Still, the risk is that separate systems will reduce potential efficiencies, as has happened in other bank-led efforts to create digital trading platforms for specialised securities.
"In an ideal world, we would all be using the same platform," says Michael Bergmann, an active Schuldschein investor as a director at Basler Kantonalbank. "It would be a hassle and cumbersome to have to remember the different passwords and different processes on several platforms."
The Swiss-based lender has joined LBBW’s Debtvision. (Bloomberg LP competes in many areas of fixed-income electronic trading.)
Schuldschein issuance has surpassed term loans and nonrated corporate bonds in Germany, helping fuel growth for the Mittelstand, the small enterprises that form the nation’s manufacturing backbone.
Deal size averaged about €210m in 2016, roughly in line with the US private placement market, according to a European Commission report. About three-quarters of issuers were companies with less than €5bn in sales.
Larger borrowers include car maker Volkswagen, which raised €600m in January following a €900m sale in 2017. Schuldschein also makes up about 60% of gross debt at Axel Springer, publisher of Bild, Germany’s biggest tabloid.
"Schuldschein currently offers more favourable terms than other financial instruments," says Heike Rust, head of group finance at Axel Springer.
The advantages of Schuldschein, particularly for smaller borrowers, include deal terms that are largely standardised. Deals can be divided into tranches of different maturities, with fixed or floating rates. Each tranche is further cut into slices according to demand — effectively creating a series of direct loans of varying sizes but identical terms. Buyers generally hold their pieces until maturity. By spreading out the credit among investors, borrowers can avoid bank lenders that might insist on selling additional services.
Technology has helped make the market more liquid, encouraging investors to seek larger deal slices, says Christoph Osterbrink, head of corporate finance at hospital operator Asklepios Kliniken.
One drawback of this market is that renegotiating deals is more complicated than it would be with bonds or loans. Borrowers have to reach agreement with each lender separately, rather than getting majority support and imposing a deal on everyone else. Sales also take about six weeks, similar to a loan, as investors assess the risk in-house.