Schuldschein Loans Explained

Schuldschein loans in short

Schuldschein loans (Schuldscheindarlehen, often abbreviated SSD) are a German private placement instrument that sits between a bilateral bank loan and a bond. Legally, a Schuldschein loan is a loan agreement under the German Civil Code (§§ 488 ff. BGB), usually evidenced by a certificate of indebtedness (Schuldschein). Economically, it works like a privately placed bond: an arranging bank structures the loan, markets it to institutional investors such as savings banks, cooperative banks, insurers, pension funds and foreign banks, and distributes it in tranches with different maturities and interest bases.

The lenders' positions can be transferred, which gives investors a degree of liquidity, but the instrument is not a security and is not listed. For borrowers, Schuldschein loans offer access to a broad investor base with standardised documentation, moderate costs, no rating requirement and no prospectus.

The market has grown well beyond German issuers, and today Schuldschein loans are also used by companies from other European countries, the United States and Asia.

This briefing explains the legal nature of the instrument, documentation, the role of arrangers and agents, transferability, the investor base and the main points for borrowers and investors.

Legal nature: a loan, not a security

A Schuldschein loan is a loan under § 488 BGB. The lender undertakes to provide the agreed amount, and the borrower undertakes to pay interest and repay the loan when due. The Schuldschein certificate is merely evidence of the debt: it does not embody the claim, and the borrower can demand its return on repayment (§ 371 BGB). Increasingly, transactions are documented and settled digitally without a physical certificate.

Because the instrument is not a security, the prospectus rules for securities offerings do not apply, and it is not admitted to trading on a regulated market. This keeps transaction costs and disclosure obligations low. It also means that the market abuse rules for listed instruments generally do not apply to the Schuldschein itself, although listed borrowers must still comply with their ad hoc disclosure duties if the financing constitutes inside information.

Documentation and structure

Market practice has converged on standardised documentation, including widely used template agreements. A typical Schuldschein loan agreement contains the terms of the loan, representations, a limited set of undertakings (often a negative pledge, pari passu clause and change-of-control clause), events of default, tax gross-up provisions, rules on transfers and the role of the paying agent. Financial covenants are less common than in syndicated loans, particularly for investment-grade borrowers, but they do appear in transactions with weaker credits.

Schuldschein loans are usually issued in several tranches with maturities of, for example, three, five, seven and ten years, and with fixed or floating rates. Borrowers can thereby diversify their maturity profile. Longer tenors require attention to the borrower's statutory termination right: a borrower under a fixed-rate loan can terminate the loan in any event after ten years from full receipt with six months' notice (§ 489(1) no. 2 BGB), which cannot be excluded to the borrower's disadvantage. Tenors beyond ten years with fixed rates are therefore less common.

The governing law is usually German law, and jurisdiction is often given to German courts, although foreign borrowers sometimes negotiate other arrangements. Sustainability-linked and green Schuldschein loans, in which the margin depends on ESG targets or the proceeds are used for green purposes, have become a significant segment; see our briefing on sustainability-linked loans.

Arrangers, paying agents and the placement process

The arranging bank, or several arrangers, advises the borrower on structure, pricing and timing, prepares the information memorandum and the loan documentation, markets the transaction to investors and allocates the tranches. Investors make their decisions on the basis of the information memorandum, the borrower's financial statements and their own credit analysis. Because the instrument is not rated in most cases, investors rely heavily on their own credit assessment.

The paying agent, often the arranger, handles payments of interest and principal and maintains the register of lenders, which is important because the borrower must know to whom it owes payments after transfers. The placement process is typically quick: after mandating the arranger, preparing documentation and marketing, transactions can be completed within several weeks. Pricing is set by reference to market rates and a margin determined in the marketing phase, sometimes with an initial price range that is tightened as demand builds.

Transferability

Lenders can transfer their positions, which gives Schuldschein loans their secondary market. Transfers take place either by assignment of the claim (§ 398 BGB), by which only the repayment and interest claims pass, or by assumption of the entire contractual position with the consent of the borrower, which is usually given in advance in the agreement. The method matters for investors: a contract transfer moves all rights and obligations, while an assignment leaves the original lender in the contractual relationship.

Agreements often restrict transfers, for example to credit institutions, insurers and other institutional investors, or exclude transfers to competitors of the borrower. Under German commercial law, a contractual prohibition of assignment does not prevent the assignment of money claims arising from a transaction that is a commercial transaction for both parties; the debtor can, however, continue to pay the original creditor (§ 354a HGB). The paying agent's register and the notice requirements in the agreement ensure that the borrower knows the current lenders.

Investor base and regulatory points

The traditional investor base consists of German savings banks and cooperative banks, insurance companies and pension funds, supplemented by foreign banks and asset managers. For insurers and pension funds, the eligibility of Schuldschein loans for their investment portfolios depends on the applicable investment rules, and the instrument's legal form as a loan is relevant to that analysis. Banks hold Schuldschein loans as loan exposures subject to the usual capital requirements.

Granting loans is a regulated banking activity in Germany (§ 1(1) sentence 2 no. 2 KWG). Investors that are not banks, such as funds and insurers, should therefore check whether acquiring Schuldschein positions in the primary market or through the arranger may qualify as lending business requiring a licence, or whether an exemption or a secondary-market structure applies. Borrowers should be aware of their own position under the anti-money laundering and sanctions rules applicable to the arranger. More on financing structures is on our page on lending and acquisition finance and capital markets.

Tax and cross-border aspects

Interest payments to foreign lenders are generally not subject to German withholding tax where the loan is a plain loan without profit participation and is not secured by German real estate, but the position must be checked for each structure, and agreements contain tax gross-up clauses that allocate the risk of withholding tax to the borrower, subject to exceptions. Foreign borrowers must check their own domestic withholding tax rules, because many investors cannot accept deductions, and the availability of treaty relief for the main investor groups. The deductibility of interest for the borrower is subject to the usual interest barrier rules.

For foreign borrowers, a German-law loan agreement raises questions about the enforceability of judgments and the recognition of German jurisdiction clauses in their home country. Investors, in turn, assess the legal environment of the borrower's jurisdiction, including insolvency law. Legal opinions on capacity, authority and enforceability are customary for foreign borrowers and are usually delivered by counsel in the borrower's home jurisdiction and by German counsel.

Secondary market and enforcement

Although positions can be transferred, the secondary market is less liquid than the bond market, and many investors hold their positions to maturity. Transfers usually take place through the arranger or other banks, with the paying agent updating the register. Pricing in the secondary market depends on the borrower's credit standing, market rates and the remaining term of the tranche concerned.

If the borrower defaults, each lender can generally accelerate and enforce its own claim, subject to the terms of the agreement. Unlike in a syndicated loan, there is usually no facility agent with authority to act for all lenders, and unlike under the German Bond Act (SchVG), no statutory collective procedure for creditor decisions applies; see our briefing on bondholder votes under the SchVG for comparison. Coordination among lenders therefore depends on voluntary cooperation or on a restructuring framework such as a StaRUG plan, which can bind dissenting creditors if the statutory majorities are reached in each class.

Schuldschein loans from the borrower's perspective

The instrument suits mid-sized and large companies that want to diversify their funding beyond relationship banks without the costs of a rated bond. Key considerations include:

• Size and tenor: transactions are flexible in size; tranches can be tailored to the maturity profile.
• Disclosure: no prospectus, but investors expect regular financial reporting and transparency.
• Restructuring: because Schuldschein loans are held by many lenders without a trustee, amendments require the consent of each lender unless the agreement provides for majority decisions. In a crisis, this can complicate restructurings, although the StaRUG offers tools to bind dissenting creditors through a restructuring plan.
• Costs: arrangement fees and margins are usually below those of a bond for comparable credits, especially for unrated issuers.

Illustration: a hypothetical family-owned machinery manufacturer with no credit rating raises EUR 150 million through Schuldschein loans in four tranches of three to ten years, two fixed and two floating. Savings banks, an insurer and several foreign banks participate in the placement. The agreement includes a negative pledge and a change-of-control clause but no financial covenants, and part of the proceeds is used to refinance an existing bank facility early.

How TRW & Co helps

We advise borrowers, arrangers and investors on Schuldschein loans: structuring and documentation, information memoranda, green and sustainability-linked features, consistency with existing financing agreements, transfers and secondary market issues, regulatory questions for investors and amendments and restructurings, including under the StaRUG. Our banking and finance team works with our restructuring colleagues where needed. Contact us to discuss a placement.