The German market for Schuldschiene is growing especially in the non-investment grade rating categories. While corporations substitute banks, institutional investors are using beneficial regulatory changes to gain higher yields.
According to the recent Scope Ratings study “German market for corporate ‘Schuldschein’ opens up to non-investment grade issuers”, a volume of twelve billion Euro has been issued in the form of Schuldscheinen in 2014. Until the end of July, a volume of already ten billion Euro has been issued as the market is gaining momentum. According to the study, four reasons are and will further increase the market’s size:
On the demand side, institutional investors are searching for attractive yields and a diversification from traditional credit exposure. For investors, Schuldscheine offer, besides other advantages illustrated in the study, “comparably compelling yields, asset risk diversification and long-term asset matching,” the study claims. The lack of liquidity on the secondary market seems to be no problem for investors as they usually follow a buy-and-hold strategy.
Second, a supportive regulatory framework stabilises the demand side for Schuldscheine. “Insurance companies in particular are expected to boost the demand for high-yielding Schuldscheine, after regulations for investments by pension funds and insurance companies in high-yield assets were relaxed earlier this year”, says Scope Rating in a press release. On the supply side, Basel III regulations have had a favourable impact on the Schuldschein market as banks limit their loan exposure, particularly to small companies.
Third, Scope Ratings sees a rising trend of non-investment grade companies issuing Schuldscheine. “In the past, companies needed a first-class rating to issue Schuldscheine,” says Olaf Tölke, Managing Director for Corporates at Scope Ratings. “This has now changed. In their search for yields, institutional investors are subscribing for debt issuances from companies with only average credit quality.” Of the 25 percent of companies on the Schuldschein market having a credit rating, about 75 percent are investment grade. Of the firms with no credit rating, only 40 percent are investment grade. This shows that currently about a third of Schuldschein issuers are not even investment grade according to Scope’s sample. Tölke expects this number to grow even further.
A fourth reason for the growing Schuldschein market is the desire of firms to use Schuldscheine as a conventional refinancing instrument. This is done primary to become more independent of banks but also due to higher speed, efficiency, flexibility, discretion and confidentiality in the issuing process.