Billy
22 September 2011
Credit Research
Sector Report
German Schuldschein Loans – A Primer
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Schuldschein loans ("Schuldscheindarlehen") are bilateral loan agreements in a form unique to the German market. They represent a source of capital market financing similar to bond financing for issuers with long-term funding needs. For an investor with a long-term investment objective (i.e., buy-and-hold strategy), they are an important alternative to investing in bonds. In contrast to bonds, Schuldschein loans are not classified as securities. They are bilateral, unregistered, and unlisted loan agreements, which are sold directly to institutional investors. Schuldschein loans are not traded on an exchange, but on an over-the-counter basis.
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Schuldschein loan agreements are characterized by the informal nature of their documentation. The documents usually include only a few pages. The Schuldschein concept is embedded in a strict legal framework: the German Civil code ("Bürgerliches Gesetzbuch" – § 488 et seq.). This makes the short documentation possible, and, more importantly, protects issuers and investors.
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The favorable accounting treatment of Schuldschein loans is one of their attractive characteristics. Plain vanilla Schuldschein loans do not have to be mark-to-market, but can be reported at amortized cost. This holds true both under German accounting rules and IFRS, hence avoiding P&L volatility, which would be the consequence of fair value accounting. The accounting treatment of structured products is more complicated and at least part of the Schuldschein has to be markto-market.
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German public authorities are the most important group of issuers in the Schuldschein loan market. The total public Schuldschein market was sized EUR 302bn at the end of 1Q11, which is 32% lower than in
1999. The reason for this decrease is the stronger reliance of the public sector on bond financing. Since 1999, the volume of bonds issued
Credit Research
Sector Report
German Schuldschein Loans – A Primer
■
Schuldschein loans ("Schuldscheindarlehen") are bilateral loan agreements in a form unique to the German market. They represent a source of capital market financing similar to bond financing for issuers with long-term funding needs. For an investor with a long-term investment objective (i.e., buy-and-hold strategy), they are an important alternative to investing in bonds. In contrast to bonds, Schuldschein loans are not classified as securities. They are bilateral, unregistered, and unlisted loan agreements, which are sold directly to institutional investors. Schuldschein loans are not traded on an exchange, but on an over-the-counter basis.
■
Schuldschein loan agreements are characterized by the informal nature of their documentation. The documents usually include only a few pages. The Schuldschein concept is embedded in a strict legal framework: the German Civil code ("Bürgerliches Gesetzbuch" – § 488 et seq.). This makes the short documentation possible, and, more importantly, protects issuers and investors.
■
The favorable accounting treatment of Schuldschein loans is one of their attractive characteristics. Plain vanilla Schuldschein loans do not have to be mark-to-market, but can be reported at amortized cost. This holds true both under German accounting rules and IFRS, hence avoiding P&L volatility, which would be the consequence of fair value accounting. The accounting treatment of structured products is more complicated and at least part of the Schuldschein has to be markto-market.
■
German public authorities are the most important group of issuers in the Schuldschein loan market. The total public Schuldschein market was sized EUR 302bn at the end of 1Q11, which is 32% lower than in
1999. The reason for this decrease is the stronger reliance of the public sector on bond financing. Since 1999, the volume of bonds issued