The Schuldschein instrument has become
significantly more popular in recent years as European
corporates search for less heavily-regulated products in an
increasingly burdensome market.
What is Schuldschein?
A Schuldschein is a privately-placed, medium to
long-term, unsecured debt governed by German law. In recent
years, it has become an increasingly popular option for those
beyond the Dach region (Germany, Austria and Switzerland).
"Originally, a Schuldschein was a very German,
domestic instrument, typically used by German banks only," says
White & Case partner Karsten Wöckener. But corporates
are increasingly taking an interest in the product.
For example, the
German supermarket group Rewe entered the Schuldschein market
in 2019, seeking €300 million ($330 million) to fund
its acquisition of wholesaler Lekkerland.
As Wöckener says, Schuldschein has gradually become
useful for a more diversified funding portfolio for corporates
with a high credit quality.
"It’s nothing but a loan under German law," he
adds. "However, the more unique reasoning for its popularity is
that the look and feel is very much that of a eurobond. If we
look at it, aside from the fact that it’s a loan,
it has hybrid elements."
The product is somewhere between a syndicated loan, a
privately-placed bond and a loan participation note. This
status between bond and loan means that it draws the benefits
of each, enjoying the flexibility of a loan with the lower cost
of capital of a bond.
What makes it trustworthy to the financial community is that
it is over 100 years old and enshrined in the German Civic Code
Bürgerliches Gesetzbuch. The product comprises a
loan agreement (a Schuldscheindarlehen or SSD) and a
certificate of indebtedness: the actual
"Schuldschein is a bilateral loan agreement with
the potential for a large number of lenders," says Sebastian
Zank, corporate ratings executive director at Scope Ratings.
He’s clear that it’s not a financial
market instrument, adding: "I think it’s more
comparable to a normal loan. A great advantage of it is that
you do not have to book it on a mark-to-market basis. It
remains on the loan book until maturity."
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While there are structural similarities with securitisation,
a Schuldschein is not considered a securitisation
under local nor EU law. This means borrowers do not need to
offer a prospectus.
In addition, while under the jurisdiction of German law,
this has not stood in the way of international engagement.
Typically, the Schuldschein agreement is drafted in
German and English; sometimes even in a third local language of
the borrower if required – meaning that unfamiliarity
with the local language does not create a barrier to use.
What are the main benefits?
As Katie Kelly, senior director of market practice and
regulatory policy at the International Capital Market
Association (ICMA) points out, private placements such as
Schuldschein are not subject to the same regulatory
and market scrutiny as public offers.
"Listing is not always required, so it takes private
placement out of the scope of the requirements of the
EU’s Prospectus Regulation, which could be
extremely onerous for the target issuers," she says.
The documentation needed for Schuldschein is also
significantly lighter and typically negotiated on a much
smaller scale, often between the issuer and a handful of
investors, rather than hundreds.
Because of this, the conditions and covenants are more
bespoke and easier for the investors to monitor. Meanwhile, in
the event of something going wrong – such as a
covenant breach – there is an easier channel for
communicating with the investors to address the situation,
rather than automatic default. As a rating is not essential for
private placement, issuers do not have to go through this
process, which can be difficult.
"An SSD offers borrowers a new and diverse investor group,
largely made up of international banks, who are asset-takers
and not looking for relationships and ancillary business," says
Richard Waddington, head of syndication and sales at
Waddington pointed out that it is often used as a first
approach to the international capital markets for borrowers who
have traditionally been reliant on loans and are looking to
diversify their funding sources, but perhaps isn't yet
ready to issue a bond.
"Volumes can be below bond benchmark requirements, although
we also see some sizeable deals now and no rating is needed,"
he continues. An SSD means a borrower can raise funding in one
issue via a range of different tenors, interest structures and
currencies. Deals can really be tailormade.
Waddington also pointed out that a big plus for borrowers is
that a floating rate SSD can be prepaid if required. "The
product is not listed, has no formal prospectus, and is
generally a lower cost product to issue than a regulated bond
with all the associated costs," he says.
His thoughts on costs were echoed by others in the banking
"Regardless of an issuer’s rating, the costs for
third parties are much lower in the Schuldschein market,"
said Michael Bures, head of DCM corporates at Raiffeisen
Bank International. "As there is no prospectus requirement,
lawyer costs and legal opinion are much cheaper. Moreover,
there is no comfort letter required."
Bond covenant trends in 2020: what to
What are the risks?
"The biggest risk for the market at the moment is the fact
it has grown so quickly out of the DACH region," says Martin
Strohmeier, fixed income analyst German bank NORD L/B. "Since
the shift into eastern Europe and then elsewhere, companies
beyond the DACH region are now using it as a financing
diversification, shifting from the traditional issuer and
investor base. We’ve seen recently that it has
come out of the investment space, migrating more and more into
As Strohmeier indicates, newfound reach also delivers
"The instrument’s growing popularity means more
issuers – such as non-rated and often rather small
companies where investors have limited transparency on the
issuer – are realising that they can take advantage,"
says Zank. "We have observed a few defaults and selective
defaults with debt restructurings over the past few years."
firm Carillion, for instance, went bankrupt less than a
year after raising around $155 million on the
"If this continues, we could end up with the reputation of
the product declining," he says.
Wöckener adds: "Warnings have been issued due to
insolvent companies who have entered into transactions. I
don’t follow these views. It’s a debt
instrument. The credit risk of a borrower or issuer applies to
all debt instruments. The ways of restructuring a debt
instrument might be very different though."
Zank says that while there have been issues, he thinks the
market is still able to regulate itself, and that the
underlying regulatory framework is sufficient.
"In the end, it’s the investors who invest
consciously," he says. "If they’ve not undertaken
analysis properly, or monitored, they have to justify the
investment. In addition, arrangers who usually seriously take
their responsibility as gatekeepers to the market simply have
to stick to very general rules, and there is lots of experience
in the market."
Regardless, Zank raises the issue that loan documentation
often doesn’t address how to move forward in the
case of a debt restructuring.
"For Schuldschein, you need 100% lender agreement
on restructurings," he continues. "If there are excessive
lenders, and everyone’s opinions differ about how
a loan should be restructured, it risks being the case that it
can’t be restructured anymore and goes into
This is a peculiarity of the instrument, and
it’s important because of defaults and selective
defaults. "However, due to the increase in these instances, it
has also become well known to investors who are engaging," he
What’s currently happening in the
"Over the past five years, the main development of the
product we have seen has been the material growth in the use of
the product outside of Germany as it has been adopted by a
broad range of non-German issuers and investors," says Penny
Smith, head of private debt origination, western Europe at
Commerzbank. "It’s fair to say that SSD has become
the pan-European private placement product of choice for
investment grade and crossover companies."
The changing face of Schuldschein
However, while SSD has grown significantly beyond its
traditional German base and is now pan-European with circa
€30 billion of issuance in 2019, Smith and Waddington do
not think it will ever be viewed as a global product.
The instrument has however been celebrated in the digital
space. "Digitisation has allowed SMEs into the market and they
are able to use digital platforms, which are quicker and more
efficient than the traditional route," says Strohmeier. "Due to
digitisation, we observed that SMEs are using the market in an
opportunistic manner, such as issuing Schuldschein
more than once per year, which is new."
This had not been anticipated. "We expect that this must be
happening due to increased SME experience with digital
platforms, which they feel more comfortable tapping," he
continues. "This has been a remarkable turning point for the
Schuldschein market that has contributed, among other
factors, to the increase in issuance volume and deals per
The Schuldschein market has also been of benefit to
"It’s a very flexible product and can be
adapted for both green and ESG issuances," says Smith. "Similar
to the growth of green and sustainable loans, we saw a material
increase in green and ESG SSD issuance in 2019, and we expect
that to continue this year."
Spanish bank BBVA negotiated a €220 million sustainable
Schuldschein for the Madrid government, using
blockchain and ICMA’s green bond principles for
the debt structuring.
Companies bank on blockchain bonds to cut costs,
"Lean documentation makes it easy to include another
paragraph that refers to ESG KPIs," says Zank. While 2020 has
only just begun, he has already seen deals with ESG elements,
such as a new issues from
Faber-Castell, Verbundnetz Gas and Voith.
"When looking at the progress made in the last few years, I
think it is likely we will see plenty more
sustainability-linked Schuldschein deals coming to the market,"