The creation of SSDs must favor a secondary market
The Schuldschein market differs from the main European capital markets in several respects.
It attracts a veritable assortment of investors – from distant German savings banks to South American commercial banks. These investors, and the lightweight documents they will accept, are attracting new exotic issuers from around the world. To serve this growing parade, international banks have set up shop to close deals and take advantage of this European success story, breaking into territory that was, until recently, occupied by German banks.
But one of the most distinctive features of the Schuldschein is that it doesn’t have a proper aftermarket.
Historically there was little need for secondary trade. For centuries the Schuldschein was a domestic instrument. German savings banks and cooperative banks usually bought paper from German borrowers and held it to maturity.
But as the product has grown in popularity, it has developed more sophisticated bases of buyers and borrowers. Now, it’s just as likely to see an Asian commercial bank in a deal as a German Sparkasse.
The needs of market players have therefore become more sophisticated. As investors begin to buy credit with value in mind – rather than just to support local businesses, as savings banks traditionally did – they want the ability to trade positions.
There is evidence to suggest that a Schuldschein secondary market is emerging.
Several investors said Global Capital they were offered Schuldschein debt that had existed since the start of the pandemic.
There is a two-way street interest. Global Capital reported in March that US banks such as Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley had bid for ailing Schuldscheine.
It is not new for Schuldscheine to be sold in secondary offers. Banks such as Helaba have trading portfolios, while LBBW and ING have sold some of the trades they have taken out. Sometimes arrangers acted for some traditional Schuldschein investors eager to refresh their portfolios.
Investors wishing to get rid of Schuldschein notes often go through the banks that arranged the transaction. The paying agent is the preferred candidate, since he keeps the list of investors, and it is they who are naturally called upon. Arrangers tasked with selling Schuldscheine for an investor can expect a fee to do so, a senior Schuldschein banker said.
The problem is, this type of ad hoc negotiation means there are no set standards – like fair fee levels – and little competition among dealers.
Some major market players are reluctant to allow an active secondary market to develop. They fear that BaFin, the German regulator, will reclassify the incumbent Schuldschein. If this were to happen, all the advantages that the market enjoys under lighter lending regulation would be destroyed.
But this is very unlikely to happen. BaFin has not made any public noise about it. And why should he? The Schuldschein is one of Germany’s financial darlings. In addition, the loans are actively negotiated, so being negotiable should not deprive Schuldscheine of loan status.
The pandemic has surely caused many portfolio managers to take a closer look at their positions and led some to want to update their books.
VC Trade, one of the market’s leading digital platforms, seeks to grow its business by diversifying into secondary loan trading. It also offers this service to Schuldscheine.
Instead of complaining about the pace of change in this once dormant market, Schuldschein should see this as an opportunity. Increasing market liquidity would not harm the Schuldschein, but would remedy one of its flaws.