2019 – What in the name is Schuldschein?

2019 - What in the name is Schuldschein?

2019 was a very good year for the Schuldschein. It was the year that the international expansion grew and it became a well known financial instrument.

What is this “Schuldschein“?

The literal translation from German is Promissory Note, but its much more than that.

It’s a financial instrument, with similarities to bonds, but with less complications and more flexibilities.

First and foremost, it is not subject to the securities laws, but to the German commercial law. This means that arranging/issuing Schuldschein does not require a prospectus, even if offered to hundreds of investors.

The Schuldschein (or Schuldscheindarlehen in its full name and in short SSD) exists in the German market for decades, in a less developed mechanism than today. It was the financial crisis in 2008 that upgraded it, due to the fact that the source for financing were not the banks but investors, financial or others.

In principle, although not compulsory, this instrument is more suitable for SMEs, since it is possible to arrange notes with volumes under 100m EUR, which almost never happens in the EU highly traded stock exchanges. Its also allows more flexible terms per each note, which increases its attractiveness.

To learn more about this tool you can read at White and Case’s publication: https://www.whitecase.com/publications/alert/schuldscheine-global-alternative-product-future  or in other relevant publication.

I want to focus on the renovating and promising aspects of the Schuldschein.

Issue of Schuldschein requires the involvement of: borrower, arranger (bank or financial institution) and investors.

With the advancement of technology, we see the development of another element, which is a digital platform/marketplace. The digital platform, working closely with the arranger, which takes more the role of a lead lender or just the paying agent, provides all other operations. It already has an extended investors database, who have access to the platform and can independently check new opportunity offered on the platform, or being approached by the arranger through the platform for new opportunities. In addition, platforms can connect with other platforms, on rev-share basis and expand the distribution potential of a new Schuldschein.

The platform also responsible for all information transfers (data room and others) and transfer of documentation. There are already pilots of using the blockchain technology in the process of arranging and issuing Schuldschein.

The digital platforms are an important factor in the internationalizing of Schuldschein and will probably play an important role in secondary tradings of Schuldschein units.

For conclusion, the Schuldschein is an important example of the development of private financing and trading tools, beside the public capital markets. It’s a local instrument (German), that becomes more and more global. Currently mostly offered with borrowers the EU, but the investors databases are global.

Short update: since 2019, the Schuldschein market had a downturn in 2020, due to COVID, but 2021 was a recovery year and the prospects for 2022 are very positive.

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