„Schuldschein loans are not yet traded as other types of credit“
Trading Schuldschein loans is still in its early stages, but transactions are increasing. Peter Riedel and Artur Kozlowski explain in the second part of the Schuldschein interview why more and more investors are selling their exposures, how the sale of Schuldschein loans is carried out via a secondary market such as Debitos and which documents are important for selling them.
For the first part of the interview click here.
Who is currently selling Schuldschein loans – and why?
Peter Riedel: “The willingness of the Sparkassen to sell Schuldschein loans is slowly but surely developing. However, we cannot yet speak of a paradigm shift. We do not yet have the situation that such loans are traded like other types of credit. There is still a lot of reluctance on the seller’s side.”
Artur Kozlowski: “We must not forget where we come from: In the past, Schuldschein loans were only transferred to the issuing Landesbank in the form of a return. Otherwise, the investor held the claim until repayment at the end of the term. That was the previous procedure.”
Peter Riedel: “However, the difficulties with loans from Carillon, Steinhoff and Gerry Weber, for example, have shown that Schuldschein loan borrowers are also subject to market conditions and may find themselves in an emergency situation – with the well-known consequences. The investors, who are actively looking at their portfolio and the market, are now beginning to part with the initial securities.”
Artur Kozlowski
Are Schuldschein loans of certain industries or companies currently being sold?
Peter Riedel: “In the recent past, we have seen difficulties of varying nature in a number of industries. These mainly include the automotive, textile and renewable energy sectors. But other sectors are also affected. But don’t misunderstand: In the areas just mentioned, there are still many very healthy companies that are achieving very good economic results against the general trend.”
Artur Kozlowski: “A secondary market is not only used to sell Schuldschein loans that represent a risk – quite the contrary. A secondary market is an important tool for active portfolio management. And it also benefits investors who wish to supplement their portfolios with such investments. Investors can acquire securities via a secondary market that they cannot generate to the same extent via their own credit brokerage.”
“Secondary markets are aimed at smaller institutions that do not have direct access to international investors.” – Artur Kozlowski
How does the sale work without a secondary market like Debitos?
Artur Kozlowski: “As Peter has just said, we cannot yet speak of a booming market in which many players on both the buyer and seller sides are active. At present, trading is rather limited. Without a secondary market such a loan is offered to the own network . Investment banks are contact partners here and there and may have offer prices which they hold in store. Otherwise, we have the impression that a marketplace such as Debitos provides an enhancement for this still rather small market. We hear this again and again in discussions with potential partners. Such marketplaces and secondary markets are also aimed at smaller institutions that do not have direct access to international investors. For these, Debitos represents an additional sales channel through which they can also reach smaller savings banks, for example. These investors are not afraid of competition from Debitos, but are working with us to standardize processes. Ultimately, they also benefit when there are more offers on the market.”
Peter Riedel
How does the sale of a Schuldschein via Debitos work?
Peter Riedel: “Usually we start with a free market sounding, which means that we determine a non-binding market price. We do a short anonymous survey of our investors to find out what they would be willing to pay for a corresponding loan. With the determined price the sellers can then decide internally whether they want to make the sale or not. Not all participants in the secondary market who want to invest in Schuldschein loans, however, already have detailed knowledge of the respective companies. It is therefore advisable for sellers to provide annual financial statements and, if available, quarterly figures. In order to be able to inspect them, a confidentiality agreement must first be issued. Then an auction is held to determine the highest bidder.”
“It is absolutely essential that the seller provides potential buyers with all the documents that might be relevant to make a decision.” – Peter Riedel
So it depends decisively on the documents whether and how successfully a Schuldschein can be sold on the secondary market?
Peter Riedel: “Definitely. It is rare that an investor has already obtained external information about the company whose loan is being offered for sale. Therefore, it is absolutely essential that the seller provides potential buyers with all the documents that might be relevant to make a decision. The investor simply needs an overview of the borrower’s current economic situation: the last two annual financial statements, the quarterly reports, the EBIL evaluation, if available, and any reports on possible restructurings underway in the company.”
Artur Kozlowski: “On the seller side, there is still uncertainty as to which documents they may make available at all. What we are currently actively working on are standardized NDAs that the potential contract partners sign before inspecting the files. We are also in the process of exchanging information with various associations in the banking and Sparkassen sector, which also have an interest in making it easier for their institutions to sell on secondary markets.”
Peter: “What we need in this area are uniform transaction documents. This would significantly shorten the process and reduce the commitment of resources on both sides. Let’s just take the confidentiality agreement. Some Sparkassen do not have their own model contract. Others have one of their own, but it is not actually used in the market. However, an English version is almost always missing – despite the growing internationality of this market. As a result, many potential investors are unable to reach agreement with the Sparkasse on how this document, which is required in advance, should be structured. As a result, they are out of the question as investors. This reduces liquidity in the secondary market for Schuldschein loans desired by the Sparkassen.”
Artur: “Peter is addressing a very important issue. Many of the investors who are interested in such positions come from English-speaking countries. Thanks to the standardisation of contracts, there will no longer be any language barriers and the sellers will have a much wider range of potential investors at their disposal. As a result, better prices can be achieved. We hope that this will also pave the way for smaller institutions to sell more quickly and easily”.
Which investors are currently interested in Schuldschein loans?
Peter Riedel: “Investors who are active in the first market are also interested in a secondary market. We currently see a rather uncertain economic environment and, as a rule, insufficient interest coverage for these risks. That’s another reason why some investors don’t want to commit themselves to Schuldschein loans for so long. Normally, such an investment runs for at least six to eight years; a Schuldschein with shorter maturities is actually only found on the secondary market. Investment companies are also very interested. Their expectation of return can possibly already be satisfied by the paid ticket – supplemented by a small discount on the purchase price.”
Which prices are paid for Schuldschein loans at the moment?
Artur Kozlowski: “That depends. Basically, the better the company’s creditworthiness, the higher the proceeds. But of course the interest rate on the loan also plays a role. Thus, purchase prices may well be higher than the original issue price of the Schuldschein.”
(Image rights: istockphoto.com/scyther5)