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Speaker Series 3: Christian Hendker, Talanx Asset Management

As part of our speaker series in the build up to the International Schuldschein Forum 2017, Christian Hendker, Head of Fixed Income Research, Talanx Asset Management, explains the firm’s investment activity in 2016 and the criteria they follow to be involved in the product.

Christian Hendker will be speaking at the upcoming International Schuldschein Forum 2017 in Frankfurt on 29th & 30th March. For full information can be found on our website, or secure your place here.

The German Schuldschein market was characterized by another record year of issuance in 2016. Talanx Asset Management has been an active investor in rated and non-rated deals over the last years, as investments into Schuldscheine supported the diversification of our investment portfolio and additionally provided us with a yield pick-up to realize an illiquidity premium. In 2016 however we only invested into a handful of Schuldschein deals due to 1) the tight pricing and 2) credit quality considerations which drove us to rather invest in the corporate bond market.

The tight pricing in 2016 was to a large extent a function of surplus liquidity driven by expansive central bank policies. In one example, the Schuldschein of an issuer was even priced materially tighter than the public bond of the same issuer which followed recently thereafter: Car leasing company Sixt marketed a Schuldschein with an indicative pricing of MS+70-90 (5 years tenor) and MS+80-100 (7 years tenor) in July 2016. In October 2016 the company intended to issue a bond with an indicative pricing of MS+140-145bps (6 year tenor), significantly wider than the Schuldschein.

The disconnect between the bond market and Schuldschein market is to a large extent due to the fact that these markets are dominated by different investor groups. Whilst the bond market is dominated by asset managers and real money investors, the Schuldschein market is driven by the increasing competition from banks, even in longer dated paper. Banks seem to be willing to accept lower spreads for different reasons. They might want to invest in the Schuldschein to diversify their credit exposure but are also keen to gain other business with the issuer.

The second reason for our high rejection rate of Schuldschein deals in 2016 was a perceived deterioration of the average credit quality in the Schuldschein market as an increasing number of issuers with weak credit profile tried to tap the market whilst at the same time documentation standards were relaxed more and more. Coupon step-ups declined or disappeared and carve-outs in provisions such as negative pledge became wider and wider.

We have seen the highest execution rate for Schuldschein deals in cases where issuers were not only driven by pricing considerations. Diversification of the investor base was an important consideration of issuers we invested in. A sufficient diversification of the investor base might be of considerable value in a scenario of financial stress as we have seen in the financial crisis of 2007/2008 where capital markets were closed and banks reduced the amount of lending. Therefore, a broadened diversification also improves an issuer's credit quality. The deals we invested in 2016 were primarily originated by companies with a solid credit quality, some of them family owned businesses, which were willing to pay a premium to diversify their funding base beyond the classical banking investor with cross-selling ambitions.

Looking forward, we anticipate a more attractive environment for Schuldschein transactions in 2017 and beyond. Supply might increase in anticipation of rising interest rates and a rising number of debt-financed M&A transactions. Moreover, at some stage the credit cycle will turn and issuers might pay closer attention to their investor base instead of minimizing funding costs only. Bank investors tend to be more volatile players relative to institutional real money investors and we hope that an increasing number of issuers will appreciate the funding of a committed long-term partner.
This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.