Stuttgart Börse’s fledgling BondM platform
has worried lawyers due to its ability to issue non-investment
grade debt direct to retail investors.
The BondM platfiorm, launched in May, gives German mid-cap
companies having trouble accessing bank finance the ability to
sell bonds to retail investors directly, without the costs
involved with having an investment bank underwriting the
Issue sizes tend to be under €100 million, although Air
Berlin launched an 8.25%, €150 million issue in April
which was oversubscribed, indicating an increasing popularity
for the market.
Documentation and covenants are also kept to a minimum to
keep costs down.
Marc Plepelits of Shearman & Sterling in Frankfurt said
that keeping covenants to a minimum may make the bonds easier
for retail buyers to understand, but non-investment grade
issuers can create problems.
"I’m not sure the retail market really
appreciates the risks they’re taking with those
issuances, especially without the covenant protection," said
He compares BondM to an equity market. "They have no
covenant protection, and they’re relying on the
research that’s in the market on the issuer," he
Issuers do need to draft a prospectus and require a rating.
However a rating may be obtained from a small regional agency
as opposed to a Moody’s or a Standard &
Poor’s, and can be fairly generic and short.
Removing the gatekeepers
One bankers’ counsel was concerned that
non-investment grade companies could issue what are effectively
high-yield bonds to a retail market who may not have the wisdom
or time to understand the level of due diligence or attend
"There’s also a wonderful pricing upside for
the issuers because they can sell it to retail who really
don’t know how to price it," said the counsel.
With the large underwriting banks effectively removed to
save costs, Hendrik Haag of Hengeler Mueller in Frankfurt said
a crucial protection has been removed from the issuing
"Stuttgart is doing away with the costs of the gatekeepers
in the form of the underwriters, who would normally do a much
stricter test on the issuer," said Haag.
However Haag notes that these large banks rarely work on
deals below €100 million, so these issuers normally
wouldn’t be able to access the debt market without
the BondM platform.
Issuers do use financial advisers, which tend to be smaller
German banks such as Close Brothers. However the fact that the
larger German banks are not involved in deals in their own
backyard is telling, said the bankers’
"I thought that was an area best left to the German banks if
they wanted to play as they understood the consumer protection
environment better than we do," said a bank counsel. "But
seemingly they don’t want to play."
The counsel added: "If it’s something that the
Commerzbanks and the Deutsche Banks don’t do,
you’d be fairly sure there’s a good
reason for that."
Doing a Murdoch
The German market however does differ from other European
markets, as retail investors are relatively comfortable buying
bonds. Retail investors compare bonds with overnight deposits
and short-term bank products.
The BondM platform therefore brings together investors
looking for yield, and companies looking for cheap funding.
However for one in-house lawyer, the idea of mixing retail
investors and non-investment grade issuers is just too much.
"Retail is a very difficult subject at the best of times, and
to add on to that a credit risk issue as well, it just becomes
far too difficult," he said.
Given the lack of covenants, the real test for the market
will if one of the issuers runs into trouble, said Haag. If one
or two companies go belly up, he said, it will be a big blow
for the market segment.
For the bankers’ counsel, the reputational
risks are the biggest hurdle to getting involved. "In terms of
risk-reward, where reputation is everything, as Murdoch is
finding out, you only have to do one really crap deal to suffer
a significant downside," said the counsel.