What are Schuldschein loans?
Schuldschein loans (Schuldschein or SSD for short; plural Schuldscheine) are a special form of loan (in accordance with Section 488 BGB and Section 344 HGB), i.e., an instrument for debt financing. In addition to companies, local authorities - such as the City of Cologne - are now increasingly using SSDs to finance larger investment projects. The Schuldschein combines the long-term, structured design and fixed conditions of a bond with the individual, contractual flexibility of a bank loan. It is characterized by its low level of bureaucracy.
In contrast to a bond, a Schuldschein is not a security but a special type of loan agreement in which the Schuldschein certifies the debtor's financial obligation and securitizes the loan characteristics. Accordingly, a Schuldschein cannot be traded on the organized capital market like a bond, as they are not readily transferable to another creditor. Although there is an over-the-counter secondary market where SSDs are traded over the counter, this is very limited and only available for larger Schuldscheins. However, the obligations can be contractually assigned or transferred.
Unlike a bank loan, a Schuldschein loan is not agreed upon between a company and a bank, but usually between a company and institutional investors (so-called capital collectors). Banks often act as “arrangers” between the contracting parties, but they withdraw from the transaction after the contract is concluded and assume no liability for the repayment of the Schuldschein. The typical buyers of SSDs are institutional investors who are looking for long-term, stable, and low-risk investment opportunities, such as insurance companies, asset managers, or pension or health insurance funds.
The arrangers usually syndicate the SSD, i.e., they arrange the granting of a loan by several investors. The loan is divided into portions of EUR 50 thousand to EUR 500 thousand, which allows a large number of investors to participate and reduces the default risk for the individual investor. Depending on the structure, a different ranking of creditors can also be agreed upon, so that individual creditors bear higher risks. After repayment, the Schuldschein is returned to the issuing company with a receipt.
The relevant key figures for Schuldschein loans are:
- Volume: The sensible minimum amount for an SSD is EUR 20 million, even if promissory bills are sometimes issued for as little as EUR 10 million. The volumes are usually between EUR 50 and 150 million in order to allow as many investors as possible to participate through the denomination. In the last quarter of 2024, the average size was EUR 250 million and loans of over EUR 500 million were also agreed in some cases. Since 2016, the global market volume for SSD has fluctuated between EUR 20 and 30 billion with around 100 to 150 issues per year. After the record year of 2022, a decline in promissory note loans has been observed in the last two years, with 93 issues and a total volume of EUR 19.87 billion in 2024.
Term: SSDs usually have a fixed term of three to seven years. However, longer terms can also be agreed if business expectations are positive.
Repayment: Repayment is normally as for bullet loans, i.e., the borrower only pays the interest during the term and repays the loan on the due date. A voluntary repurchase - a premature repayment - is often not possible, which is why the payment flows are fixed. However, the creditor is usually granted an extraordinary right of termination, for example, in the event of default on interest payments or impending corporate insolvency. Unlike with many bonds, this is automatically possible for the individual creditor, but depends on the specific contractual conditions.
Interest rates and tranches: Due to the lower tradability (fungibility) of Schuldscheine, investors demand an interest premium of around 0.25 % to 0.5 % compared to bonds. This spread can also be higher if the credit rating is low. The interest rate is based on the capital market rate for similar risk classes and will also be fixed or variable depending on the loan agreement. The interest rates of the individual repayment tranches can also vary depending on the term.
Collateral and ratings: As a rule, no collateral is required from the debtor, as creditors buy promissory bills in confidence in the economic stability of the company. They can also assert their contractual rights in the event of payment defaults. Consequently, investors attach great importance to the creditworthiness and business prospects of the company and, unlike with bonds, a minimum credit rating of the borrower is required. However, elaborate external ratings are not required, even though more and more companies have them (30% in the last quarter of 2024).
- Schuldschein issuance process: Compared to other financing instruments, most transparency, reporting, and rating obligations do not apply to promissory bills. As a result, the Schuldschein issue is completed quickly (8-10 weeks) and the advertising phase is also short (one to four weeks).
Although the global market volume of Schuldscheine in 2024 was 9 % below the previous year's average with a new issue of EUR 20.7 billion, according to LBBW - an arranger on the market - it is more resilient than other financial instruments.
To date, Schuldscheine have traditionally been a German financial product, with the Germany, Austria, and Switzerland accounting for 79% of the market in 2024. However, SSDs are also attracting increasing interest internationally, particularly in other European countries.
For which companies are promissory note loans suitable?
In principle, Schuldscheine are a suitable financing instrument for medium-sized companies that cannot or do not want to finance themselves on the bond market. However, large international companies are also turning to SSDs to finance larger investment projects, which is reflected in the increasing average volume of SSDs. Traditionally, SMEs finance around half of their projects with their own funds, a third with bank loans, and 10 to 15% with subsidies. The remainder is accounted for by other instruments such as mezzanine capital and SSD.
A particular advantage for SMEs is that, unlike bonds, (1) the information obligations only apply to the contractual partner and are therefore confidential, (2) no approval from BaFin, collateral or public ratings are required and (3) Schuldscheine can make sense even for small volumes due to the low “fixed costs” of taking out a loan. In addition, (4) the contract design is more flexible and (5) the terms are longer than with many bank loans. Above all, the low bureaucracy and quick issuance of Schuldscheine is often cited as the decisive advantage over other financing instruments.
However, investors require the company to have a good credit rating, such as the hidden champions in the SME sector. The companies should be financially stable in the long term, as the necessary agreement with each individual creditor and the strict contractual obligations make restructuring difficult in the event of a crisis. In addition, liquidity is limited as Schuldscheine are generally not tradable and there is no public market, e.g., a stock exchange, for trading promissory bills.
According to LBBW figures, companies from the traditional industrial sector (basic materials, chemicals, construction, etc.) account for the largest proportion of promissory bills issued, at 24%. Non-cyclical consumption and services account for around 13%, followed by the automotive and energy sectors with 11% and 8%, respectively. According to Hessische Landesbank, which uses a different classification, most SSD issuers in 2024 were utilities, followed by industrial service providers and companies from the technology, automotive, industrial goods, and trade sectors.
How can promissory note loans be used for transformation financing?
Schuldschein loans can be used as a flexible and often long-term financing instrument to support extensive change or modernization processes in companies. In particular, they serve as a supplement to the existing financing of medium-sized companies due to their
- Flexibility: The free contract design allows the interest payment tranches and terms to be freely structured, for example, if investments in more sustainable technologies require a certain lead time. This means that they can also be used to refinance other debt instruments.
- Long-term perspective: The long-term capital commitment of promissory bills allows investments in energy efficiency and insulation or digital infrastructure, which only pay off after a few years, to be financed.
- Access to alternative sources of finance: Schuldschein loans open up another group of investors - institutional investors - to medium-sized companies with increased financing requirements for transformation. If traditional bank loans cannot cover the requirements, there is therefore no need to resort directly to the bond market.
Two special forms of promissory note loans have become established in recent years, particularly for the transition to climate neutrality:
(1) In the case of green-linked or ESG-linked Schuldscheine, the interest coupon is linked to sustainability criteria and key performance indices (KPIs) of the company. This means that if the company's sustainability improves, its interest burden is reduced. Compliance with these is often checked by external agencies. Last year, this form accounted for around 12% of the total market, a sharp decline from around 40% in 2022 and 33% in 2023. ESG deals are therefore back at the level of 2020.
It is debatable whether this trend will continue as a result of companies' extended reporting obligations under the Corporate Sustainability Reporting Directive (CSRD) or whether ESG-linked Schuldscheine can be expected to make a comeback. If the CSRD makes it less necessary to directly incorporate sustainability criteria, the sustainability of a company is likely to be directly reflected in the negotiated interest rates in the future. On the other hand, the increased transparency provided by the CSRD facilitates the use of both indicator-linked and purpose-linked structures.
(2) On the other hand, the proportion of green Schuldscheine, where the use of funds is directly linked to a sustainability project, has been increasing since 2020. The legal framework for these is often based on the Green Bond Principles (GBP), which could also be of interest to creditors when accounting for green investments. Last year, these dedicated structures accounted for 8% of all SSD issuance. However, the supply of green SSDs does not appear to meet demand: for example, the City of Cologne's first green Schuldschein in 2024 was oversubscribed threefold despite an increase in volume.
In summary, it can be said that promissory note loans can serve as an essential instrument in transformation financing to provide the financial resources for necessary adjustments and modernization. Their flexibility, long-term and tailored contractual terms make them an attractive option for companies undergoing change - be it in the course of digital transformation, the switch to sustainable business models or other strategic realignments.
