German bank Helaba is developing an aircraft-secured Schuldschein, off the back of increased market appetite and Irish lessor’s Goshawk Aviation’s debut Schuldschein issuance.

Speaking to Airfinance Journal, Christian Wolff, director, corporate finance at Helaba, says the new product, which is called Aircraft Collateralised Namensschuldverschreibung (ACNSV) will be the first Schuldschein to be secured against aircraft and will have tenors of 10 to 15 years.

Schuldschein is the largest private placement market in Europe, in 2016 amounting to over €27 billion ($29.41 billion) with over 40 international issuances. Approximately 99% of these transactions are corporates issuing unsecured notes.

Historically, Schuldschein loans were bi-lateral agreements between one bank and a relationship customer, where transactions were around $20-30 million in size. The transactions have grown in size over the years and it became a market for syndicated Schuldschein loans, which often now amount to around $500 million. Normally a German Landersbank would act as the relationship relationship bank, which would go out to meet investors. It is seen typically as the German equivalent of a private-placement type.

When the financial crisis hit in 2008, the Schuldschein segment proved to be more resilient than the more liquid capital markets transactions where bond markets dried up, while Schuldschein issuances reached a new record volume.

Schuldschein in aviation

Although Schuldschein is not a new market, many aviation companies are beginning to see its potential for capital. Irish lessor Goshawk became the first aircraft lessor to tap the unsecured Schuldshein market in November 2016, issuing a $95 million debut unsecured transaction. The issuance was arranged by Commerzbank, Helaba and NORD/LB. Sources close to Goshawk say that the lessor looks to continue to tap that market for future financing.

Airlines from the Middle East and Europe have also been in the market for Schuldschein, most notably Lufthansa, which has tapped this market for a decade.

The German airline’s most recent Schuldschein closed in December 2016 and January 2017, raising €1.2 billion ($1.3 billion). The three tranches in the deal had tenors of five, seven and 10 years.

Thomas Ingenhoven, partner at Milbank, who acted for Goshawk on its debut Schuldschein says: “Goshawk’s deal was a great success, because they managed to do the Schuldschein given that they're an Irish company in the aircraft leasing business. It's normally a German Schuldschein investor – traditionally a savings bank for instance – that understands the structure; it's a complex business model.

“German savings banks buying say $5 million of Schuldschein deals for big names is an easy business and something they can rely on put in the draw and have that for a couple of years. Goshawk are not a traditional Schuldschein issuer, but it is a good example of how the product is being marketed and is very successful also for foreign issuers.”

Increased international interest

“You see more Asian banks showing interest and a few of them are in the market and prepare for their own prospective Schuldschein arrangings as well,” Wolff says. “The investing banks may seek more opportunities with larger European corporates so they get into Schuldschein financing as well next to term loans and corporate facilities.

He adds that there are “three or four” of the aviation banks involved in unsecured Schuldschein deals for airlines and lessors so far.

The majority of the €27 billion financing that was issued in the unsecured Schuldschein market last year was taken by banks, especially smaller retail banks.

A Enhanced Equipment Trust Certificates (EETC) transaction typically comprises of at least 300 to 400 pages of documentation. Some market sources are calling the ACNSV to “the European equivalent of a EETC product”, but with less documentation.

“A typical unsecured Schuldschein has usually a very lean basic documentation  – a contract that is around 30 to 40 pages. This is known by most of the investors and makes it quicker to carry out a transaction,” says Wolff, adding: “We are highly convinced that the Schuldschein product for a private placement is a great platform to combine with more structured financings in aviation finance.”

The ACNSV also has a structurally-similar liquidity facility to the ones used in EETCs. If the issuer goes into a default or a restructuring scenario the facility would cover the interest payments to investors for periods of 18-24 months depending on the jurisdiction.

Challenges in developing the ACNSV

Wolff says that one of the main challenges in developing the ACNSV product was being able to offer an external transaction rating, similar to a EETC.

“You want to have a rating uplift compared to the underlying corporate issuer rating in order to offer an investment grade product. Currently, there are just below 10 airlines globally that have an investment grade rating, so the remaining majority is either sub investment grade or not rated. To combat this, the ACNSV is secured by a certain aircraft portfolio and provides potential further credit enhancements to ensure the transaction receives an uplift from the rating agency to reach a satisfying rating outcome.”

For most airlines, this may provide an uplift of three to five notches. If the ACNSV is placed as an investment grade product, the transaction will have significantly more access to investors – over 75% of the unsecured Schuldschein market is issued investment grade companies.

Many Schuldshein names not externally rated by main ratings agencies, but these names can still tap this market as the Schuldshein arrangers give a rating, which the retail banks and institutional investors participating in the transaction rely on.

“One challenge with the ACNSV was getting the rating methodology established,” says Wolff. “We have now established the rating methodology with a leading rating agency and a second leading agency will soon be available as well. The ACNSV generally requires only one transaction rating while with listed products such as EETC’s there are mostly three ratings attached.

One of the main differences between the ACNSV and listed capital market products is the fact that the ACNSV is not listed on a stock exchange as investors are solely registered by the arranging bank.

“Investors may account Schuldschein-based financings like the ACNSV to be marked to initial costs under the IFRS/IAS accounting principles. We see that as an advantage for many institutional investors’ books.”

ACNSV transactions will be initially euro-denominated. The structure is currently being offered to airlines but Wolff says that the bank will want to be able to offer the product to lessors as well in the near future.

“It is a competitive market to other established products such as the EETC, but the driving factor for why issuers would decide for an ACNSV private placement should be primarily a new, sustainable institutional investor base this structure can bring to the issuer,” he says.

Investor and issuer base

Although the Schuldschein market is still mainly German investors, there is a growing investor base in German speaking countries, like Austria and Switzerland, as well as in the UK and France. Sources in this market say that around a third of Schuldschein investors now come from outside of Germany.

This diversity was demonstrated in the recent Goshawk transaction, where there were two Asian investors involved, according to market sources. Sources say that Taiwanese investors have shown appetite for Schuldschein transactions, but doubts that US investors would show much of an appetite for it over a product which incorporates US law like a EETC.

The diversity in investor base was also reflected in the €1.2 billion Lufthansa transaction. The investor base ­­­ – made up of over 180 investors –  was 42% German, 35% Chinese and saw strong participation from Indian, Taiwanese and Japanese investors, according to documents seen by Airfinance Journal. There was also a strong presence from other countries in Europe, including the Netherlands, France and Sweden.

“It’s a highly reliable market for issuers, as you can rely on the investors,” says Wolff. “Schuldschein investors – such as small regional banks, insurance and pension companies - are more long-term driven.”

As this market matures, perhaps the ACNSV will be the future product of choice for aviation companies looking to issue in euro.