Thursday 21st March 2019 13:34
The Schuldschein private-debt market needs to attract investors and arrangers who remain sensitive to issuers best suited to the segment as it internationalises and digitalises in a context of slowing economic growth, says Scope Ratings.
For now, the market remains in good shape. Scope has tracked around EUR 5bn in Schuldschein debt so far this year, either settled or currently in the marketing/placement phase from more than 40 different issuers.
“We are keeping our forecast for an overall market volume of more than EUR 25bn, up from last year,” says Sebastian Zank, analyst at Scope.
Zank says several important themes emerged from the recent Euromoney International Schuldschein Forum:
1. Private debt is better suited to some issuers than others
“The SSD market remains a robust funding source in times of weak markets – but it’s not for everybody,” says Zank.
While companies such as Switzerland’s Barry Callebaut (settled) or Germany’s Bilfinger (currently placed) could well be able to place an SSD instead of a public bond which could face placements risks and which might have less favourable conditions, some others could struggle amid volatile markets and the cloudier economic outlook. Issuers in more cyclical and volatile sectors will find it tougher if not unrealistic to the tap the SSD segment: Undiversified construction, machinery, auto parts companies; companies facing structural industry change/disruption such as some non-luxury apparel and retail firms; or football clubs where commercial success and financial performance are less predictable.
“One danger is herd behaviour,” says Zank. The danger consists of either companies ill-suited to private debt markets deciding to tap the SSD segment or less experienced investors, without the capacity do proper credit analysis, backing new deals simply because of the SSD’s overall reputation and because the larger and well experienced investors have shown confidence in the broader market. Recent defaults and selective defaults among SSD issuers – such as Gerry Weber and Folli Follie – reflect financial troubles at the companies rather than a problem with the SSD market.
“All the same, it should be a case of ‘lessons learned’ for the investors and arrangers involved given the SSD’s positioning as a market for ‘buy-and-hold’ debt instruments,” says Zank. A full, forward-looking, fundamental analysis of industry, business and financial risks remains crucial.
2. Further market diversification
More evidence is emerging of how the SSD is maturing is with the internationalisation of arrangers and issuers. Take debut deals this year from Norway’s Aker, Denmark’s Schouw, France’s Vicat, Valeo and Peugeot, Czech Republic’s EP Infrastructure and CPI Property Group, the jumbo debut of Barry Callebaut and most impressively India’s Reliance Industries. The introduction of a standard documentation introduced by the LMA can serve as a good starting point for debut SSD issuers but also for some arrangers which are less experienced with the debt instrument. Arrangers have estimated active investors at more than 500, ranging from long-standing German investors to institutional investors in Asia, South America and the Middle East.
3. Digital platforms present risks and liquidity-related cost savings
Digital platforms’ long-term success is mostly linked to their ability to reach a critical mass of investors.
“However, we also think their capacity to act as a gatekeeper is crucial, screening the SSD market from ‘freeloader’ companies and arrangers wanting to take advantage of the instrument’s reputation regardless of an issuer’s suitability for private-debt issuance,” says Zank.
It’s not only the direct cost and time savings, digitalisation also offers some “hidden” cost benefits, he says. In facilitating smaller ticket sizes and more frequently, the platforms could help some corporates better control liquidity and avoid long periods of negative carry when they have raised debt but aren’t yet able to deploy the funds.