Introduction to Schuldscheindarlehen
The Schuldschein Loan (Schuldscheindarlehen) (“SSD”) is a floating rate or fixed rate debt capital markets instrument which is not extensively regulated. Governed by German law, the product and its terms are familiar to the market participants worldwide. The market for SSDs has grown considerably in recent years. SSDs are attractive instruments, especially for small and medium sized companies requiring medium to long term financing. Typical investors are many regulated entities, such as credit institutions, insurance companies and funds, including pension funds. One main driver for their interest in SSDs is the positive treatment of SSDs (and NSVs, see below) under statutory investment regulations applicable to these investors. Further, – at least under German GAAP – investors may avoid mark-to-market principles for SSDs and NSVs on their balance sheet.
An SSD is a combination of a bilateral loan agreement and a certificate of indebtedness issued following the disbursement of the loan. The SSD is a very flexible instrument. While the market has developed standards in terms of typical clauses and features, there are only very few legal limitations in terms of structuring and documentation. Typically, an SSD has the following features:
- Volume between EUR 10-200m;
- Term between 2-10 years (longer tenors via NSV, see below);
- Interest rate may be fixed rate or floating rate;
- Set-up takes about 6-10 weeks;
- Documentation of about 20-30 pages;
- Typically, no collateral is provided by the borrower and no external ratings are required;
- In general, more than 30 investors per transaction (but also bilateral or club deals).
Schuldschein transactions usually provide for several tranches, which deviate as to tenor and interest basis. This allows to accommodate for deviating investor interests in the same deal.
As a matter of German law and market practice, for tenors of more than 10 years the parties regularly use a so-called Namensschuldverschreibung (German law registered bonds, “NSV”). This instrument is very similar to the Schuldschein in most respects.
SSDs (and NSV) may be placed either by way of a “direct” method or an “indirect” method.
Under the direct method, the loan agreement will directly be concluded between the borrower and the investor(s). The arranger (e.g. a bank) simply acts as a broker between the investor and the borrower.
In practice, however, the so-called indirect method is more commonly used. Under this structure the loan is concluded (or the NSV is issued, respectively) between the borrower and the arranger (usually a bank) in the first phase, with the loan amount (SSD) or issue proceeds (NSV) being disbursed by the arranger. In the second phase, the arranger sells and transfers positions in the SSD / NSV to the investor(s). As a result, the investor(s) will hold direct contractual rights vis-a-vis the borrower.
As SSDs are not securities, they may not be listed on an exchange or settled via a clearing system (like Clearstream or Euroclear). Unlike securities, any transfer may be either executed by way of assumption of contract or by assignment. However, in practice, the borrower’s consent to any such assignment or assumption of contract is given in advance, subject to certain limitations, and pro forma transfer agreements are usually provided for in the documentation package. Thus, secondary transfers are considerably simplified, making the SSDs more akin to a capital market instrument than a “normal” bilateral loan. However, in practice, most investors in this instrument are typical “buy and hold” investors. Hence, there is usually no active trading market in SSDs. While NSVs are in fact securities, their particular format results in characteristics and market practices very much akin to those as described for the SSDs above.
Depending on the identities and role of the parties, the features of the SSD/NSV and the specific transaction set-up, a banking license (e.g. pursuant to German Banking Act, Kreditwesengesetz) may be required for the borrower and/or the arranger, in order to enter into a related transaction.
Investors may require a permit or license for lending activities under German law. However, according to a long-standing practice of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) on what constitutes lending activities, a permit or license is generally not required if the investor only acquires a claim to repayment under an SSD (or NSV) that had been already fully disbursed (like in the “indirect method” as described above). If, however, an investor disburses the loan directly to the borrower (like in the “direct method as described above), as a rule this would require a permit or license to engage in such lending activities, unless the transaction falls under certain exceptions.
Similarly, borrowers need to be aware of the fact that their activities may constitute deposit taking services which also require a permit or license under German law. The most notable exceptions to this are found where, instead of raising funds from the “public”, the borrower raises funds from certain institutional investors. Pursuant to a long-standing practice of BaFin, this is, inter alia, usually the case when using the “indirect method”.
Besides the advantages described in general at the beginning of this paper, the following additional points could be added:
- Low issuance volumes possible as SSDs/NSV may in practice be issued from as little as EUR 10m
- Great flexibility in structuring the interest (fixed or floating)
- Security: If the borrower (SSD) / Issuer (NSV) is a credit institution or a private bank, creditors of SSDs/NSV may benefit from deposit protection schemes/funds. E.g. the deposit protection fund (Einlagensicherungsfonds) of the German (private) Banks Association for the time being also covers claims of non-bank creditors under SSDs and NSVs.
- Provides balance sheet advantages as buy and mark-to-market adjustments usually do not apply
- Possibility to have structured SSDs/NSVs (e.g. derivative elements, secured transactions or securitization techniques - while unusual in the corporate finance space, this is increasingly used in other areas, see page , “Focus of this Guide”)