Denmark: Schuldschein – An alternative financing option for Danish borrowers in the German loan market
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Schuldschein loans are no longer the preserve of German Mittelstand borrowers and have begun to play an increasingly important role in cross-border financing. This article examines some of the key features of Schuldschein loans which we believe are an attractive financing alternative for Danish borrowers.
The Schuldschein loan market has grown considerably and become more international in recent years. The private nature of the market makes its size difficult to estimate, although a January 2019 report by Scope Ratings puts the size of issues in 2018 at €24.5bn, down 10% year-on-year. another compared to 2017, but more than three times higher than in 2013.
This expansion has been driven in part by the extension of Schuldschein loans to “crossover” borrowers with below investment grade characteristics and to borrowers outside the core German, Austrian and French Schuldschein markets. This in turn has allowed Schuldschein loans to become an attractive alternative to syndicated loans for international borrowers. Recent Danish deals include Danish Crown, Danish Agro and notably Danish agricultural company Dansk Landbrugs Grovvareselskab (DLG) with €250m financing arranged by Danske Bank, NordLB, Nykredit and UniCredit with maturities of 3, 5 and 7 year. Danish banks, including Nordea, Handelsbanken and SEB, are increasingly making the Schuldschein market available to their corporate banking customers. In addition, the Schuldschein market is opening up to Nordic borrowers, including Swedish food producer Orkla and automobile Saab.
This article summarizes what Schuldschein loans are and why borrowers and lenders participate in the Schuldschein loan market.
What are Schuldschein loans?
There is no strict legal definition of a Schuldschein loan. The term “Schuldscheindarlehen” literally means “a loan evidenced by a debt instrument”. However, this is not a strict legal requirement for a Schuldschein loan and most Schuldschein loans today are issued without a certificate.
There are, however, market conventions that define what is typical of a Schuldschein loan. The box at the end of this briefing highlights six key attributes.
Who borrows Schuldschein loans and why?
The “classic” Schuldschein borrower is a German Mittelstand company, with “investment grade” characteristics but which is too small, or which on the contrary does not wish to seek a rating. Austrian and French firms with similar creditworthiness have traditionally been the second largest cohorts.
More recently, the Schuldschein market has expanded to include:
Borrowers who are “cross-linked” (i.e. below investment grade) credit risks; and
Borrowers in jurisdictions outside traditional/core Schuldschein markets.
The attractions of Schuldschein loans for borrowers include:
Market access: Schuldschein loans provide access to a broader/different group of creditors than traditional syndicated loan or bond markets.
Reduced transaction costs: Schuldschein documentation is short, simple and has minimal disclosure requirements, which means transaction costs are generally lower than syndicated loans or bond documentation.
Maturity profiles: By market convention, it is common to borrow Schuldscheinloans on the same terms but with different maturities, corresponding to higher/lower interest rates. This can give borrowers the opportunity to create a more suitable maturity profile than with traditional syndicated loans or (at least some types) of bonds.
pacts: Often, Schuldschein loans offer greater flexibility and/or leeway than syndicated loans. For example, financial covenants can be omitted or given additional leeway to avoid “hair-trigger” defects; and baskets can be set as a percentage of assets rather than in absolute terms to allow the business to grow. This reflects the absence of any possibility for the “majority lenders” to make changes to these provisions or waive events of default on behalf of all Schuldschein lenders.
Who lends Schuldschein loans, and why?
Traditionally, Schuldschein loans were issued by a small number of large European banks and then distributed mainly to German savings banks (Sparkasse). In recent years, the universe of buyers has expanded to include, among others, pension funds, insurers and other types of banks (including banks headquartered in Asian jurisdictions). For cross-border Schuldschein loans, there are basically two broad categories of Schuldschein lenders. The first are institutions that seek to build a diversified portfolio of loans with modest capital and at a limited cost. Schuldschein loans are attractive to these institutions because of their abbreviated and ostensibly simple documentation (which can take less time to review than lengthy syndicated or bond documents); no or low minimum holding size (holdings as small as €500,000 are relatively common); and free transferability (as with most Danish banks that do not syndicate loans or swap debt in the secondary loan market, Schuldschein lenders generally “buy to own”, but principled ability to trade remains important ).
Further, these institutions are reassured by the absence of any “majority lender” concept in Schuldschein loans that would allow institutions with larger exposures to make changes they might not be comfortable with. The second category of Schuldschein lenders are institutions that have other exposures to a borrower. While some German borrowers rely primarily on the Schuldschein market to obtain loan capital, this is rarely the case for international borrowers, who will generally have other relationships with creditors, for example in connection with loans unionized or bonds. Institutions that already have exposure to a borrower may view participation in a Schuldschein loan as an attractive way to increase their exposure. Again, free portability and the inability for other lenders to grant modifications or waivers on their behalf are usually key attractions – these features may allow them to apply more favorable capital or accounting treatment and be part of integral to their ability to grant the loan. . Additionally, Schuldschein loans often yield a slightly higher return than syndicated loans, especially when a lender agrees to a slightly longer term.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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