A downtrend in issuance for German Schuldschein debt recently contrasts with the strong start to the year, which boasted double-digit percentage growth in the first quarter, including a record €2.7 billion ($2.95 billion) transaction for Porsche Automobil Holding SE.
(Bloomberg) — A downtrend in issuance for German Schuldschein debt recently contrasts with the strong start to the year, which boasted double-digit percentage growth in the first quarter, including a record €2.7 billion ($2.95 billion) transaction for Porsche Automobil Holding SE.
Major market players attribute the fall in sales to borrowers opting for the more attractive corporate-bond market, where they can get better rates for longer maturities and are able to raise larger deal sizes. A bitterly-fought restructuring case involving French care home operator Orpea SA has also dented investor confidence.
“The drop in the market has been caused by strong external rated investment-grade names issuing bonds instead of Schuldschein, as well as the absence of French issuers,” said Klaus Pahle, head of Schuldschein at ING Bank NV.
To be fair, arrangers weren’t expecting overall volumes to top last year’s record of almost €33 billion and had foreseen investment-grade rated companies returning to the bond market.
Looking forward, some major players are hoping a combination of refinancing and potential acquisitions could help bolster volumes amid a drop in big-sized deals this quarter.
Some think that French issuers, which used to be the top international borrowers in the market, could return even as the Orpea case lingers. The company is facing a legal challenge from creditors and minority shareholders over its restructuring plan.
Deals will remain priced at higher levels than bonds, given Schuldschein are typically buy-to-hold debt which lenders retain until maturity, and they will be more selective in current market conditions.
Issuance of corporate Schuldschein, a debt that mirrors both loan and bond structures, fell roughly 11% to about €13.5 billion in the first six months of the year, while the number of issuers dropped to 63 from 77 during the same period last year, according to Bloomberg data.
Here’s what industry leaders say. Responses have been edited for length and clarity.
- Paul Kuhn, managing director at Bayerische Landesbank:
“Dealflow is slowing down due to higher spread requirements by investors. Solid investment-grade issuers, in particular, find the bond market a better choice for their high-volume needs. And as such, we see smaller transactions of around €100 million-€150 million sizes dominating the corporate Schuldschein market this year. M&A should help see more transactions at sizes of €300 million or more in the second half of 2023. More than €10 billion of maturing Schuldschein in the second half can support refinancing flow. Pricing might remain higher than in 2022.”
- Nicolas Rabier, head of loan capital markets for EMEA at BNP Paribas SA:
“As we continue to wait for the first French issuer to tap the market, Benelux countries and the Nordics are currently the most frequent regions to issue outside the German-speaking area and were well-received by investors. Dealflow will remain high, but below last year’s level. We also expect average deal size further below last year’s level as typical public issuers go back to the bond markets. We also expect the first French issuers taking advantage of the strong Schuldschein market.”
- Ingo Nolden, co-head of European corporate debt markets at HSBC Holdings Plc:
“Foreign borrowers, including those from the food and beverage sector, demonstrated the available market depth for international issuers. We expect more than €25 billion of sales for the year, subject to M&A.”
- Klaus Pahle, head of Schuldschein at ING Bank NV
“Pricing seems to have manifested at higher spread levels, which can also be observed in the overall banking market. Investors are becoming a bit more selective toward better credits and are punitive if pricing is too tight. International issuance is likely to pick up again since we see the market being under-supplied and in great demand.”
- Matthias Hoffmann, senior originator with Landesbank Baden-Wuerttemberg
“The inclusion of ESG/green parameters remains on the agenda of corporates and follows the pattern of 2022 – both using key performance indicators as well as sustainability ratings. We see a continuous transaction supply in June/July. The motivation is general corporate purposes, refinancing as well as the financing of M&A.”
- Klaus Distler, head of corporate debt capital markets at Landesbank Hessen-Thueringen Girozentrale
“ESG continues to be an important aspect. M&A activity has been mediocre due to high multiples, and confidence in markets weaker due to the geopolitical situation. Overall volume should be somewhere between €20 billion-€25 billion.”
- Carlo Fontana, global head of syndicate at UniCredit SpA
“We expect similar patterns as last year with less activity in Q3/Q4 based on shrinking investors’ budgets. Selectivity on the investor side will remain the name of the game. Therefore we would not expect tightening of current pricing levels. The market has been less active than the record year of 2022 because of fewer international issuers, due to the ongoing Orpea case. For most of the rated companies, bond markets are currently more attractive than Schuldschein.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.