A Once-Hidden Credit Market Has Tripled in Recent Years

When a beloved regional beer ramps up production, there’s always a question of whether it can gain new fans without losing what made it special. Something similar is happening with a German debt instrument known as Schuldschein, a hitherto hidden corner of the market where borrowing has tripled in recent years. Not quite a loan and not quite a bond, the traditional Schuldschein was hammered out by local lenders for solid local manufacturers. Now companies like Volkswagen AG, ArcelorMittal and U.S. paintmaker Sherwin-Williams Co. are turning to Schuldschein as a way to borrow large sums from investors as far afield as China. Some of this new-style borrowing has blown up. How well can artisanal lending fare on the global stage?

Schuldschein (pronounced schult-shine) is an alternative way to raise funds instead of loans or bonds. Deals can run from 10 million euros ($12 million) to more than 1 billion euros, and they can include tranches of different maturities and currencies. Raising a Schuldschein is similar to raising a loan. A company mandates one or more banks to arrange a deal, which is then syndicated in a process taking about a month. After order books close, final pricing is set based on investor demand. Each tranche is then divided up into various-sized slices and issued to lenders, sometimes numbering in the hundreds.