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22 September 2011

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 by German public authorities has more than doubled to a total of EUR 1,445bn at the end of 1Q11. The German federal government has relied more heavily on bond financing since the introduction of the euro and the development of the euro-zone bond market.

Related Publications
Sector Flash – Corporate Schuldschein Loans – Issuance to increase in 2011 vs. 2010? 24 January 2011 Sector Report – Corporate Schuldschein Loans – 23
June 2010
Sector Flash – Back to the roots – 22 April 2009
Sector Flash – Corporate Schuldschein Loans – A
booming market – 22 July 2008

Since January 2007, Schuldschein loans became eligible for ECB credit operations with the introduction of the new framework for monetary policy instruments and procedures of the ECB. This has been a favorable development for the Schuldschein loan market as it makes the instrument more interesting for banks as investors.



Contents
German Schuldschein Loans – A Primer __________ 1
Advantages for Investors ______________________ 2
Advantages for Issuers _______________________ 2
Definition of Schuldschein Loans ________________ 3
Terms and Conditions ________________________ 4
Transfer of Schuldschein Loans _______________ 5
Right of Early Repayment ____________________ 5
Regulatory Attractiveness for Investors ___________ 5
IFRS 9 – new accounting rules for financial
instruments to replace IAS 39_________________ 7
ECB-Eligibility _____________________________ 7
Issuers ____________________________________ 8
Public Sector Issuers _______________________ 8
Non-Public Sector Issuers ___________________ 9
Non-German Issuers_______________________ 10
Investors__________________________________ 10
Primary Market for Schuldschein Loans__________ 10
Secondary Market __________________________ 11





There are a number of advantages for issuers of Schuldschein loans when compared to bond issuance: quickness and efficiency, flexibility, discretion and confidentiality, and low issuing costs.
The...
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