Following Italian tax reforms making it easier to use Schuldschein, UniCredit has led two pioneering deals by corporates wanting to take advantage of the instrument, which is gaining an international following. Edward Russell-Walling reports.

Unicredit

As more non-German firms issue Schuldschein, the practice has now spread to Italy, where hitherto unfavourable tax regulations have been withdrawn. So far, there have been two Schuldschein deals out of Italian entities, and UniCredit has been a lead manager on both of them.

A halfway house between a loan and a bond, the Schuldschein has traditionally been very much a German affair, issued by German Mittelstand companies and bought by German banks. In recent years, however, the instrument has attracted borrowers from beyond Germany’s borders.

Outside interest

These companies have discovered that the Schuldschein market is a useful alternative when public markets are volatile or bank loans are elusive. Their documentation demands are relatively light since they are not treated as bonds in German law and do not require an offering circular.

The investor base has been internationalising too, as more non-German financial institutions have recognised the benefits of this privately placed, unlisted debt. While the notes are accepted by the European Central Bank as collateral, they do not need to be marked to market. They offer exposure to sound credits that might otherwise be unavailable, with typically higher returns than those offered by loans or investment grade bonds.

“Schuldschein have had a complex history in Italy,” says Giovanni Franza, a UniCredit director in debt capital markets (DCM), responsible for Italian corporate debt origination. “They were subject to a complex system of withholding tax on loans from non-Italian legal entities, while bond products had an exemption. That prevented Schuldschein being used by the corporate sector.”

The regulations, which effectively required investors to have an Italian branch in order to avoid the 26% tax, were removed in 2015, making it much easier for Italian borrowers to take advantage of the Schuldschein product.

A couple of them had done it before, except that they had issued out of foreign subsidiaries. Telecom Italia had issued out of Luxembourg, for example, and Pirelli out of the UK. After the regulations changed, potential issuers felt their way slowly and it was some time before the first Italian transaction took place, in September 2017.

Bigger companies

The pioneering Italian issuers have been big corporates rather than the medium-sized firms that characterise the German market. The first was Buzzi Unicem, one of Italy’s largest cement producers. It had previously raised Schuldschein funding for its German subsidiary, Dyckerhoff, which would also play a role in the 2017 deal. “However, Buzzi had a preference for funding at the parent company level,” says Mr Franza.

With choppy conditions in the public markets, Buzzi turned to Schuldschein as an alternative funding source. Thanks to the track record at Dyckerhoff level, Buzzi was expected to gain easier access than a pure debut issuer. With UniCredit, Commerzbank and Landesbank Baden-Württemberg as lead managers, a Schuldschein transaction was launched in July 2017 to allow for an extended marketing period which bridged the summer holidays.

“Two things made the Buzzi deal notable,” says Patrick Mannl, UniCredit director, DCM, Germany, and a Schuldschein specialist. “It was the first issue directly out of Italy after the change in the tax regime, and it had a dual structure.”

The multi-tranche transaction, which originally sought to raise €125m, was intended to refinance maturing Schuldschein tranches at the Dyckerhoff level. It featured not one but two borrowers, Italy-based Buzzi Unicem and Germany-based Dyckerhoff. Investors could choose between them – the thinking being that traditional German bank investors might feel more comfortable with a domestic issuer.

The deal was well received by investors, who could select not only the borrower but also the term and whether they preferred fixed or floating rates. With the issue about 2.5 times oversubscribed compared with the final size, the volume was doubled to €250m with (undisclosed) pricing at the lower end of the initial ranges.“Pricing of Schuldschein is on a case-by-case basis,” says Rudolf Bayer, UniCredit’s head of medium-term note private placement syndicate in Germany. “It has to do with the kind of issuer, sector, credit profile and so on.”

A German household name with solid credit quality will enjoy access to the smaller German banks that are typical Schuldschein investors. “International investors are often more price sensitive than these smaller banks so, given the same credit quality, there can be pricing differences,” says Mr Bayer. He adds that, all things being equal, a non-domestic issuer is likely to pay more than a German one.

Buzzi offered both options and, given its desire to concentrate debt in the parent company, the resulting investor split was positive. In the final volumes, €200m was issued by Buzzi and €50m by Dyckerhoff. The largest chunks of the deal went to Germany (39%), the Benelux countries (38%) and Italy (12%). Banks took 68% of the allocation, with treasury banks taking another 16%, co-operative banks 2% and savings banks 1%. Funds took 1%, while the remaining 12% went to 'others'.

Pirelli makes its mark

Like Buzzi, the next Italian issuer – tyre maker Pirelli – was not a Schuldschein debutante. Pirelli was majority acquired and delisted by ChemChina in 2015. ChemChina cut its stake to below 50% in the course of relisting Pirelli in 2017, after spinning off its industrial business. Pirelli then embarked on a further refinancing of the bank facilities. It sold unrated Eurobonds worth €600m in January 2018 and executed a €200m private placement, led by UniCredit, in March. Then it diversified its funding sources more broadly. 

“The Eurobond market was more volatile in the second quarter of 2018,” says Mr Franza. “So the company, advised by UniCredit, decided to return to the Schuldschein market.” Pirelli had executed a small Schuldschein transaction via an international subsidiary back in 2012.

The company decided to press ahead after volatility increased in May and the case for Schuldschein became more compelling. Commerzbank, ING and UniCredit were mandated to lead a deal and order books were opened in the last week of June.

The marketing period that followed lasted about four weeks, typical for a Schuldschein deal, according to Mr Bayer. It was marketed as a €300m transaction with six tranches – three, five and seven years, fixed and floating.

Once again, investors liked what they saw and the size of the deal was increased to €525m, priced at the lower end of the initial ranges. The bonds were allocated in three tranches, because only floating tranche orders were accepted.

Asia interest

Demand was focused on the five-year tranche, and there was a particularly high level of interest from Asia. Banks took 100% of the transaction, while geographical distribution broke down into 58% Asia, and just under 10% each to Italy, Germany and Netherlands. Turkey took nearly 8% and Austria nearly 6%.

The past three years have seen healthy levels of issuance. As a private placement market, accurate statistics on Schuldschein can be hard to pin down, but UniCredit estimates annual volumes to have been €28bn in 2016 and €27bn in 2017. It reckons that this year’s total may fall short of that but will still be in excess of €20bn. “More than 10 years ago, the size of the market was €5bn,” says Mr Mannl. “This will be the third year in a row that volumes have been €20bn plus.”

The investor base is much more international than it used to be, as are the issuers. By UniCredit’s reckoning, 44% of Schuldschein volumes originated outside Germany in 2016, with 37% in 2017, and the figure is heading for an estimated 45% in 2018.

Italian borrowers so far have been Italian in name but international in fact, and their deal sizes have been larger than those usually seen in the German market. The team thinks that the likelihood of growth in the Italian Schuldschein market is high, if only because the existing base – with only two transactions – is so low.

“After some years of extreme liquidity in the bond market, we are seeing retracement,” says Mr Franza. “We don’t know what will happen in the future but, if there is more volatility, having a [Schuldschein] alternative will be beneficial for issuance.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter