Progress Through Technology

Vorsprung durch technik is one of the most famous straplines in advertising history.

The legend goes that in 1982, the year he founded ad agency, BBH, Sir John Hegarty visited an Audi factory in Germany and spotted the phrase on an old, fading poster. He decided that these three words, translated inelegantly as progress through technology, would define Audi’s future.

The rest is history. In fact, history is proving that Hegerty had spotted something more than an extraordinary slogan. His phrase was prophetic. Our technology-led progress since 1982 has been remarkable across all sectors, from transportation to commerce to media to finance. And that progress is only gathering pace.

This week, we’ve been on the road in Germany, visiting dealers and issuers in Hannover, Stuttgart, Frankfurt and Munich. Of course, Germany’s fixed income market is one of the world’s most developed. However, an element we tend to overlook is the strength of Germany’s Schuldschein market, which continues to attract issuers and investors from all over the world.

Schuldschein defined

Until recently, Schuldschein was seen as a bit of a backwater in German fixed-income. But in the last few years, it’s grown into a mature market, one that issued €35 billion in 2017.

Schuldschein is an effective way for private or unrated companies to raise between €10 million and €1 billion. Tranches can be issued in different maturities and currencies and it’s a non-mark-to-market instrument. This flexibility is a bonus for issuers and investors and led to it becoming an attractive option following the financial crisis when corporations in Germany could still access the Schuldschein market even as the global bond and loan markets shut up shop.

Schuldschein was originally designed for local German manufacturers, but established companies such as Volkswagen, AG and ArcelorMittal now use the market to diversify how they access capital. A shift in recent years has seen the market extend beyond German borders with international investors buying up high yielding debt in the hunt for better returns.

International corporates are also now tapping the market, looking to take advantage of its flexible, user-friendly system. As mentioned, to issue, a company doesn’t need a credit rating and transaction details can remain private. Further, the nature of any issuance is flexible and relatively burden-free when it comes to paperwork, even if the deal is worth billions of euros.

Whilst a light approach to administration attracts issuers, it does leave the market open to the accusation that companies who tap Schuldschein are only doing so because they’re unable to access more rigorously regulated markets. Carillion’s story should act as a cautionary one but, as the FT states: “recent ruptures have not undermined Schuldschein, but have merely shown that it is not suitable for every company.”

Schuldschein 2.0

Like traditional fixed income markets, Schuldschein is undergoing huge change at the hands of technology. Recognising the size of the opportunity, fintech companies are striving to disintermediate the market by building offerings that service both issuers and investors.

Given the relative simplicity of the documentation required by companies who engage in the market, many are trying to build a “platform to end all platforms” to connect issuers and investors. Schuldschein seems the perfect asset class for this type of solution.

But even in a market like Schuldschein, technology isn’t a panacea and it is causing some exasperation. In spite of good intentions, the volume of Schuldschein platforms being launched is causing users an administrative headache. In many respects, rather than lessening inefficiencies by removing human involvement, poorly built platforms are increasing them.

At Origin, we know that even if the workflow and documentation are relatively simple, as in MTNs, dealers still add huge value by helping issuers and investors reduce the administrative burden and converge on a price. Across fixed income, no platform has been able to smoothly bridge the gap between bid and ask. Despite its potential, Schuldschein looks no different.

Fixed income 3.0

When technology streamlines workflows, there is progress. But that doesn’t mean removing people from the process.

The automation debate will continue, with doomsayers (or optimists, depending which way you look at it) proclaiming how technology will do away with all human interaction in professional services. This just isn’t true. There will be streamlining but there’s still a place for high-quality accountants, lawyers and bankers. Markets need human oversight. Schuldschein proves it.

We now have 17 Schuldschein issuers using our product and we hope the number will grow as we gain popularity and familiarity among dealers and investors. However, we continue to focus on the largest issuers (who will likely issue EMTNs, CDs, etc). There is a long tail of smaller, unrated borrowers who may find themselves on a platform, but marketing and credit work for those borrowers are even more important, which makes disintermediation even less likely.

Schuldschein is a good example of a market with potential for tech integration. But it also proves how even tech-friendly environments still need a hand from first-class issuers and dealers.

Turns out, progress through technology requires human guidance and oversight, although, I admit, that strapline doesn’t have quite the same ring to it.