Schuldschein Loan (Promissory Note Loan)

What is a Schuldschein loan?

Schuldschein loan (German: Schuldscheindarlehen, SSD for short; also called a promissory note loan) denotes a loan under Section 488 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) that a company takes up through a bank from several institutional investors. These are professional capital investors such as savings banks, cooperative banks, insurers, pension funds, professional pension schemes (Versorgungswerke) and funds. In English the instrument is called a promissory note loan, but the German term Schuldschein is also used internationally. The bank that organises the placement is called the arranger. The Schuldschein itself is merely a document evidencing the claim and not a security. The loan is therefore neither admitted to a stock exchange nor offered with a securities prospectus.

The instrument sits between the bank loan that a company negotiates with a single bank and the bond, a tradable security. Because many lenders are involved, the contracts are standardised and the terms are oriented to the capital market, the Schuldschein is regarded as close to the capital market. Legally, it remains a loan. It is used mainly by established mid-sized and large companies that want to broaden their debt capital beyond their house banks. The parties involved are the borrower, one or more banks as arranger and paying agent, and the investors. The basis is a loan agreement along market-standard templates.

Process: how a Schuldschein loan is placed

The borrower mandates a bank as arranger. The arranger analyses creditworthiness, prepares an investor presentation and the contract documentation with the company, and proposes volume, maturities and a price range. In the marketing phase, it collects the amounts that investors wish to take on (subscription requests); interest margins and allocation are then fixed and the funds are paid out. From mandate to payout, two to four months often pass in practice, towards the upper end of that range for first-time borrowers.

Several tranches, that is, partial amounts with different maturities, between three and ten years are common. Floating-rate tranches are tied to Euribor, the interest rate at which banks in the euro area lend to one another. Fixed-rate tranches are oriented to a market rate for the relevant maturity. In addition there is a surcharge (margin) that reflects creditworthiness. Repayment is generally bullet, that is, in a single amount at the end of the term. Investors can transfer their shares by assignment or assumption of the contract, but there is no organised trading; most hold to maturity.

Requirements and contract content of a Schuldschein loan

Investors expect an established business model, several years of audited annual financial statements, a stable positive result and a sustainable debt ratio. It is usually measured as the ratio of debt less liquid funds to EBITDA, earnings before interest, taxes, depreciation and amortisation. An external credit rating is not required; investors rely on the arranger's credit analysis and their own reviews. A practical lower limit is often volumes between EUR 10 million and EUR 25 million. Most placements lie in the mid double-digit to triple-digit million range, because the fixed costs are spread only over larger amounts.

Schuldschein loans are predominantly granted without collateral. Contractual protective clauses take its place:

• Negative pledge: The borrower grants no collateral to other creditors without placing the Schuldschein creditors on an equal footing.
• Pari passu clause: The claims rank at least equally with other unsecured liabilities.
• Cross default: A payment default on other financings entitles the investors to terminate.
• Change of control: If the majority shareholding changes, the investors can terminate.
• Financial ratios (covenants): for example an upper limit for the ratio of net debt to EBITDA; with very good creditworthiness, that is, credit standing, these are sometimes waived.

Early repayment is usually excluded for fixed-rate tranches or possible only against compensation; floating-rate tranches can often be repaid on interest dates. There are now also sustainability-linked variants, in which the use of proceeds is tied to environmental projects or the margin is linked to sustainability indicators.

Costs, accounting and refinancing

In addition to interest, there are an arrangement fee that depends on volume, paying agent fees, costs for legal advice and preparation, and the ongoing effort of reporting to investors. Because part of these costs is fixed, the burden per euro falls as volume rises.

In annual financial statements under the German Commercial Code (Handelsgesetzbuch, HGB), the Schuldschein loan is a liability, recognised at the amount that is to be repaid (settlement amount). If a discount is withheld on payout (Disagio), it may be spread over the term as a prepaid expense item (Section 250 (3) HGB). Because the tranches are bullet, the full amount falls due for repayment on each maturity date. Refinancing is therefore prepared with a long lead time, often a year or more before maturity.

Schuldschein loans for growth companies and in company acquisitions

For technology companies in the growth phase, the Schuldschein loan is as a rule not suitable. The investors are predominantly conservative capital investors who expect fixed interest from a stable cash flow and do not want to bear entrepreneurial risk. Companies that are still consuming liquidity do not meet this expectation, and the usual volumes mostly exceed their entire debt capital requirement. At this stage, venture debt, bank loans with development components or subordinated funds are more likely to come into consideration.

The Schuldschein becomes interesting when a company is sustainably profitable and has a larger financing need, for example for acquisitions or the refinancing of several bank loans. In a company acquisition, it has a second side: if the target company has a Schuldschein loan outstanding, the change of control clause decides whether the financing must be repaid on completion. In the bridge from enterprise value to equity value, the value of the shares, the loan including accrued interest counts as financial debt. If a fixed-rate tranche has to be repaid early, any compensation to the investors is added.

Worked example: Schuldschein loan of EUR 60 million in three tranches

A profitable industrial technology company with EBITDA of EUR 30 million places a Schuldschein loan of EUR 60 million in three tranches. All terms are assumed.

• Tranche A: EUR 20 million, three years, floating at Euribor of an assumed 2.0% plus a margin of 1.4% = 3.4%; interest EUR 680,000 per year
• Tranche B: EUR 25 million, five years, fixed 3.9%; interest EUR 975,000 per year
• Tranche C: EUR 15 million, seven years, fixed 4.3%; interest EUR 645,000 per year
• Interest in the first year: 680,000 + 975,000 + 645,000 = EUR 2,300,000; EUR 2.3 million divided by EUR 60 million = about 3.83%
• One-off costs: arrangement fee of 0.5% = EUR 300,000 plus EUR 150,000 for legal advice, paying agent and preparation = EUR 450,000
• Average term, weighted by volumes: (20 × 3 + 25 × 5 + 15 × 7) / 60 = 290 / 60 = about 4.83 years
• One-off costs per year: EUR 450,000 / 4.83 = about EUR 93,000, which is about 0.16% of EUR 60 million; total burden about 3.83% + 0.16% = 3.99%
• Debt ratio after the placement: net debt of an assumed EUR 54 million divided by EUR 30 million EBITDA = 1.8; an upper limit of 3.5 has been agreed
• Distance to the upper limit: it would be reached only if EBITDA fell to 54 / 3.5 = about EUR 15.4 million, that is, by about 49%

At a volume of EUR 10 million with the same tranche structure and the same fixed costs, EUR 150,000 plus EUR 50,000 of arrangement fee would be incurred, together EUR 200,000. Spread over the average term, that is about EUR 41,000 or about 0.41% per year, more than two and a half times the figure for the larger volume. The total burden would rise to about 4.25%, even before a higher interest surcharge for a smaller borrower is taken into account.

The result shows two things. At EUR 60 million, the Schuldschein is a long-term financing at predictable cost with a wide gap to the agreed ratio. With small volumes, the fixed costs eat up part of the advantage over a bank loan. The maturities after three, five and seven years at the same time spread the refinancing risk over three dates.

Distinctions: Schuldschein, bond, syndicated loan and venture debt

• Bond: a security that can be traded on the stock exchange and requires a prospectus for a public offering. The Schuldschein loan remains a loan with a closed circle of institutional investors.
• Syndicated loan: a loan from several banks administered by one bank as agent, often with a working capital line that can be drawn and repaid repeatedly, and with collateral. The Schuldschein loan also appeals to non-banks and is usually granted as bullet and unsecured.
• Venture debt: debt capital for growing, often not yet profitable companies, with smaller volumes, ongoing repayment and frequently warrants over shares.
• Overdraft facility: a short-term working capital line from the house bank for fluctuating needs. A Schuldschein does not replace it but supplements it with long-term funds.

Common mistakes

• Bullet maturity not planned. Repayment falls due in one sum. Anyone who tackles refinancing only in the last year negotiates under time pressure.
• Change of control clause underestimated. In a later company sale, it can trigger immediate repayment of the entire volume.
• Reporting obligations underestimated. Investors expect punctual financial statements and evidence of the financial ratios. Delays strain the relationship with a broad circle of creditors.
• Negative pledge overlooked. It restricts later secured financings, for example for an acquisition or a property.
• Volume chosen too small. Fixed costs and low investor interest make small placements expensive.
• House banks neglected. Working capital lines, payment services and guarantees (bank guarantees) stay with the banks. Anyone who sees them only as an arranger loses support for the ongoing business.

Frequently asked questions

Does a company need a credit rating for a Schuldschein loan?

No. The decision is based on the arranger's credit analysis, the company's documents and the investors' own reviews.

From what volume is a Schuldschein loan worthwhile?

In practice often from a magnitude of EUR 10 million to EUR 25 million; most placements are larger. For smaller amounts, bank loans or a small syndicated loan are as a rule cheaper and simpler.

What distinguishes a Schuldschein loan from a bank loan?

Above all the number of lenders and the structure. A bank loan is negotiated by the company with a single bank, often with collateral and ongoing repayment. With a Schuldschein loan, the volume is spread across many investors; the contracts are standardised, and it is usually granted unsecured and as bullet. Legally, both are loans under Section 488 BGB.

Is a Schuldschein loan secured?

As a rule not. The investors are protected by the negative pledge, the pari passu clause, termination rights and, where applicable, financial covenants.

Can a company that is still making losses take up a Schuldschein loan?

As a rule not. The investors expect a stable cash flow from which interest and repayment are served. For growth companies before profitability, other forms of debt capital are customary.

What happens to the Schuldschein loan if the company is sold?

The change of control clause governs this. If the contract contains a termination right, the investors can demand repayment on completion, and the buyer must provide for the repayment in its financing.

The Roemer Capital view

For the technology companies that Roemer Capital advises in funding rounds from Series A to C, a Schuldschein loan is usually not yet an issue. As a benchmark it is nevertheless useful, because it shows what institutional lenders require. In Roemer Capital's understanding, the company must be capital-ready, that is, able to service its loans from ongoing business. A reliable reporting system and robust planning are also expected. As a fractional CFO, Roemer Capital builds the financial model and reporting in such a way that a later debt financing can build on them.

In a company sale, Roemer Capital reviews existing Schuldschein loans of the target company for change of control and termination rights. If tranches have to be repaid on completion, Roemer Capital builds the repayment into the purchase price bridge and the timetable so that the buyer's financing is aligned with it.