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Hello, I am the PressXAI-Mind, the eXplainable Artificial Intelligence.
Schuldschein Bonds with the PressXAI-ExchangeTM
An unique analysis is run on the Pressiton Exchange directly, by using a financial statements of the borrowers, with a business development projection carried out by the Artificial Intelligence systems which makes it uniform, and available online to all investors at the same time.
The main results are:
* Pressiton All Seeing Eye (PASE)
* PASE Internal Strength
* PASE Debt
This is a form of a scoring system, which can lead to a rating system in the future.
It is supported by a traditional indicator analysis, business valuation, capital injection risks assesment and SWOT.
Companies from across Europe, and even the U.S. and Asia, are turning to Schuldschein as a way of borrowing sums from investors as far afield as China. The instruments are also starting to be used for “green” investments.
1. What is a Schuldschein?
Schuldschein (pronounced schult-shine) is an alternative way to raise funds. Not quite a loan and not quite a bond, traditional Schuldschein promissory notes were created by German lenders for deals which can run from 10 million euros to more than 1 billion euros, and they can include tranches of different maturities and currencies. Raising a Schuldschein is similar to obtaining a loan: A company asks one or more banks to arrange a deal, which is then syndicated before final pricing is set. Each tranche is then divided up into various-sized slices and issued to lenders, who sometimes number in the hundreds.
2. How is a Schuldschein like a bond?
Deals can have maturities surpassing five years, which is more like a bond than a loan. The notes also offer greater access to institutional capital-markets investors, such as insurers and pension funds, than the bank-dominated loan market. Investors have the option of selecting fixed-rate pricing on tranche slices, whereas corporate loans are almost always floating rate. Schuldschein lenders generally pick fixed rates for long-dated tranches and floating rates for shorter tranches.
3. Who uses them?
Smaller companies with sales of less than 5 billion euros dominate the Schuldschein market by the numbers, according to a European Commission report. This reflects the fact that German banks often use the notes to make loans to the Mittelstand, the nation’s network of small manufacturers. Now the market is expanding beyond its traditional heartland of Germany, Austria and Switzerland. Asian lenders have targeted Schuldschein as a growth opportunity.
Volume from other countries tripled in the first half of 2019 to make up 43% of new deals.
4. What are the advantages for borrowers?
Schuldschein are favored in Germany because they’re private, simple to use and based on local law. The market is light on paperwork, with even 1 billion-euro deals only having agreements comprising a few pages at most -- a marked difference to doorstop-sized bond prospectuses. There’s no requirement to publish deal terms because Schuldschein aren’t publicly traded or covered by transparency rules under the European Union’s MiFID II regime. Further cost savings come from not needing a credit rating.
5. What’s in it for lenders?
The biggest lure is comparatively high yields from generally investment-grade borrowers. Lenders can also expect Schuldschein borrowers to draw down the financing, which is better than being paid low fees for providing untapped revolving credit facilities. Also, unlike bonds, Schuldschein don’t have to be marked to market. That’s a boon for investors as the pricing of the instruments doesn’t fluctuate like bonds.
6. What are drawbacks of Schuldschein?
Even with recent growth, only 26 billion euros of Schuldschein were sold last year, about a 10th of the amount raised in Europe’s investment-grade corporate bond market. Renegotiating terms in the event of a cash crunch is cumbersome because deals need to be struck with every lender individually. For lenders, Schuldschein investing can entail more legwork than bonds due to the lack of financial transparency and credit reports. The market is also less liquid than bonds, partly due to a predominance of buy and hold investors.
7. What about those blowups?
The downside of growth is that risk has increased in a market that traditionally saw few defaults. Investors in a 131-million euro Schuldschein were wiped out in early 2018 amid the collapse of U.K. contractor Carillion Plc. More than 100 investors in a 755-million euro facility were also caught up in South African retailer Steinhoff International Holdings NV’s financial troubles. This shows that increased risk is likely to be a consequence of growth in the once rock-solid Schuldschein sector, as it continues to expand beyond the realm of just highly-rated German companies.
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What's on offer?
There is ample investor liquidity available, so issuers have a wide range of options. There are a variety of reasons why more and more issuers are opting for the Schuldschein instrument instead of other possible financing routes.
Issuers want:
1. To diversify their range of investors and take advantage of light documentation requirements. The Schuldschein placement process does not include the requirement to prepare a prospectus, and documentation based on German law tends to be slim.
2. To build up a maturity profile. Usually a number of tranches (e.g. 3, 5, 7 and 10 years) are offered to investors at the same time. Offering a range of maturities in parallel improves the maturity profile. Instead of having to cope with a high bullet repayment, the borrower can decide on each maturity date whether to refinance via a new Schuldschein or repay the tranche from free cash flow.
3. A cost-efficient product. Issuing costs are lower than with other products, there is no requirement for a prospectus, often the documentation is prepared in-house by one of the arrangers and there are no listing or any other associated disclosure obligations to be observed. This all makes the Schuldschein a viable option for low-volume issues. Schuldschein can be as small as €25m to €50m.
4. A margin-efficient product. More than a hundred investors are approached for each transaction, and investors from various jurisdictions (across Europe, Asia and the Middle East) compete to join a transaction and offer best-in-class execution to issuers.
On the investor side, the growth of the Schuldschein market is not just supported by banks and savings banks but also by institutional investors such as insurance companies and asset managers. Ten years ago, German insurance companies were the main non-bank investors in the market. More recently and in parallel with the emergence of the French Euro Private Placement Market, French asset managers and insurance companies have entered the Schuldschein fray. In the last 18 months, investors from the Benelux countries have joined the party.
Technicalities
1. Schuldschein is not a security, and no prospectus is required for issuing a Schuldschein.
2. Schuldschein bonds are either directly concluded between the investor and the borrower, which is normally arranged by an investment bank as arranger or broker, or, more commonly, indirectly concluded between the arranger acting as primary lender and the borrower. In such a case, the arranger assigns and transfers his or her contractual position to one or more investors. Although Schuldschein bonds are structured to meet the demands of secondary market trading, investors normally pursue a “buy and hold” strategy. In secondary transactions, the arranger of a Schuldschein loan will often act again as an intermediary between the original investor and the buyer. The arranger may also act as the administrator or agent of the Schuldschein loan for its entire term, even if the loan documentation does not necessarily assign such a role to him or her.
3. Because Schuldschein bonds usually utilise relatively simple documentation and are not subject to any prospectus or listing requirements, they can be issued quickly and at relatively low cost, while the used private-placement method allows preserving a certain degree of discretion. Because they are bilateral contracts and not securities, the loans’ documentation may be tailored specifically to the contracting parties’ demands.
4. Schuldschein bonds are normally “plain vanilla” instruments with a fixed maturity and interest rate. However, there are also different types of structured Schuldschein bonds in the market, starting from Schuldschein bonds with an interest rate based on a swap rate to Schuldschein bonds that are based on how well a basket of certain assets performs. Such structures may allow certain investors who are restricted from investing directly in certain derivative products to invest in a structured Schuldschein loan that provides for similar economic exposure.
5. A Schuldschein loan is typically governed by German law and provides for exclusive jurisdiction of German courts. The choice of German law for a Schuldschein loan is valid and binding, even if the parties to the Schuldschein loan have no connections to Germany. However, in cases where the parties to the Schuldschein loan are both domiciled in the same jurisdiction outside Germany, a German court would also consider the mandatory provisions of that jurisdiction’s laws if they contradict German law. This does not apply if there is a minimum connection to Germany between the parties or the terms of the Schuldschein loan, in which case German law would exclusively apply.
The parties may choose arbitration to resolve their disputes, although arbitration is infrequently used in German law contracts because many German market participants consider these proceedings costly, time intensive, and less effective than proceedings at state courts. If the Schuldschein loan’s documentation is in English, a German translation may be necessary for court proceedings.
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