Loading ...
Chapter 7 of 15
Credit ratings, spreads, and the Schuldscheindarlehen
5 min read
How do German companies raise debt capital?
Corporate vs. Government Securities
| Aspect | Government (Bund) | Corporate |
|---|---|---|
| Credit risk | Sovereign (AAA) | Varies by issuer (AAA to BB) |
| Yield | Lower (risk-free benchmark) | Higher (includes credit spread) |
| Liquidity | Extremely high | Varies; often lower |
| Regulatory burden | Standardized | Prospectus requirements |
Credit Ratings
Three major rating agencies assess creditworthiness: • Moody's: Aaa (highest) → C (default) • S&P: AAA → D • Fitch: AAA → D Investment Grade: BBB-/Baa3 or higher High Yield (Junk): BB+/Ba1 or lower
The Credit Spread
Spread = Corporate Yield - Government Yield (for same maturity). This compensates investors for taking additional credit risk. Example: SAP bond yields 3.5%, equivalent Bund yields 2.5% → 100 bps spread.
Major German Issuers
Schuldscheindarlehen (Bonded Loans)
A distinctly German instrument—not a security but a special loan agreement: • Governed by BGB § 488 (lending law), not securities law • Not publicly tradeable; transferred by assignment • Less regulatory burden than bonds • Popular with mid-cap companies (Mittelstand) *Note: Schuldscheine are NOT bonds despite sometimes being confused with them.*
CREDIT SPREAD EXAMPLE
A BBB-rated German corporate bond yields 4.2%. Equivalent Bund yields 2.5%. The 170 bps spread reflects credit risk, liquidity, and market conditions.
KEY TAKEAWAY
Corporate bonds offer higher yields in exchange for credit risk. The spread tells you how much extra compensation you're getting.