The Schuldschein loan is a German law debt product that many businesses are now using as an alternative to borrowing under a syndicated facility agreement or issuing debt securities. Volumes during 2022 hit a record €30 billion, with savings banks, insurance companies and pension schemes among those active in the market as lenders. So, what are its key features, and why is it proving so attractive to both borrowers and investors?

Key features

Schuldschein loans do not legally constitute a security: a Schuldschein is not a note or a bond. Instead, a Schuldschein loan constitutes a standardised loan contract under the German Civil Code which is evidenced by a certificate of indebtedness. The only legal function of the certificate of indebtedness is to evidence that the issuer of the certificate owes the amount set out within it (subject to its terms). The certificate does not constitute a payment claim in and of itself. 

Because a Schuldschein loan does not constitute a security, it cannot be listed or traded on a stock exchange. The Market Abuse Regulation, other post listing obligations and formal prospectus rules do not apply.

Schuldschein loans can be secured or unsecured and can involve a single lender or multiple lenders. Typically a Schuldschein is unsecured and initially owing to a single lender who then syndicates it. This is especially the case where unregulated investors wish to invest in Schuldscheine, because investing into a Schuldschein in the "primary market" is a regulated banking activity in the form of bank lending.

Table 1 below summarises some of the key features of Schuldshein loans in comparison to other German law debt products. 

What is the attraction?

Investors may be attracted to Schuldschein as a product because they are prevented by regulatory rules from investing in debt securities or because they have exhausted their allocated debt security investment budget. Although Schuldschein loans are transferred using the same mechanics as other German law loans, most Schuldschein loans provide few, if any, restrictions on partial or full transfers by lenders, which is often not the case in syndicated loans. In addition, from an accounting perspective, there is no need to constantly reflect the mark-to-market value of a Schuldschein investment, in contrast to listed securities.

Attractions for borrowers typically include:

• relatively short and simple documentation, although more complex terms from LMA-style loan documentation are now becoming more prevalent in the market; and
• potentially lower pricing, driven by the relatively wide investor base.

What do parties need to consider?

Parties considering using Schuldschein should be aware that many of the regulatory and enforceability issues that apply to German law loans generally are likely to apply to Schuldschein loans. They should also ensure they understand the commercial and regulatory implications of lending or borrowing using the documentary terms and mechanics typical in the Schuldschein market. Legal advice should be taken as early as possible.

Table 1 – Schuldschein loans compared to other German law debt products