European banks enter hidden debt market seeking growth

Bloomberg

European banks are turning to a little-known corner of the debt market as they seek new growth amid slumping loan demand.
At least seven lenders, most recently including UBS Group AG, have made their debuts as Schuldschein arrangers this year, pushing into a market traditionally dominated by Germany’s landesbanks. The new entrants, also featuring ABN Amro Group NV and Danske Bank A/S, are tapping the tiny market to help win business from companies too small to sell international bonds and to give larger borrowers access to a paperwork-light source of funds.
Offering Schuldschein helps in “supporting the client, and obviously earning some new-issue fees,” said Jens Frederik Nielsen, global head of debt origination at Denmark-based Danske, which led its first two deals this year and plans to do at least four more next year. “The Schuldschein market is a good fit for a number of Nordic companies,” Nielsen said.
The big German arrangers have worked with new entrants to grow Schuldschein issuance, which only totals 21 billion euros ($24 billion) this year compared with 388 billion euros for Europe’s loan market. The debutants can introduce the product to their customer base, while the large arrangers provide easy access to an established pool of investors.
“This is internationalisation, and that’s good for the market,” said Paul Kuhn, head of debt capital markets origination at Bayerische Landesbank.
The Munich-based bank, a top three Schuldschein arr-anger, worked with Italian newcomers Mediobanca SpA and Unione di Banche Italiane SpA on a deal this year.
The Schuldschein market is luring borrowers outside its traditional German-speaking heartland, partly because it’s proven to be a steady funding source even when global volatility has choked off bonds or loans. Thin documentation requirements are also a notable contrast to book-length loan contracts.
UBS is working with Commerzbank AG and Schuldschein market leader Lan- desbank Baden-Wuerttemberg on a euro-Swiss franc deal for Swiss convenience-store operator Valora Holding AG. No one at UBS was available to comment on the deal, according to Lena Nunkoo, a London-based spokeswoman.
Valora is seeking 100 million euros, a fairly typical size for a Schuldschein, even if borrowers such as Deutsche Lufthansa AG and Fresenius SE have done 1 billion euro-plus sales. Schuldschein are often broken up into different-length tranches and currencies, with parts sold to possibly hundreds of investors in a process that takes a month or two.

BORROWING DOWNTURN
Still, while Schuldschein offer a new opportunity for banks, the market hasn’t been immune to the wider downturn in European corporate borrowing this year. Marketwide issuance is down 6 percent and on track for the first annual decline since 2014. That’s still better than the 9 percent drop for the loan market and an about 20 percent decline in investment-grade corporate bond sales as the European Central Bank unwinds stimulus measures.
New entrants also have to convince clients to enter a market they aren’t familiar with, as well as persuading predominately German investors to buy notes from smaller foreign companies. That hasn’t been too difficult so far, according to Danske’s Nielsen.
“The market is generally open to new credits from a broad range of industry sectors,” he said. The change in the financials-market backdrop also “bodes well for the Schuldschein market in 2019.”