Schuldschein: Helping SITA Rebuild the Airline Sector

When global air transport infrastructure provider SITA was seeking to extend its cash buffers, Germany’s Schuldschein market caught the eye of its Group Treasurer and Finance Director, Andrea Sottoriva. TMI talks to him about how issuing debt mid-pandemic has been a positive experience for all.

In a challenging economic environment, a significant cash holding is advantageous, yet market unpredictability still weighs heavily on its confident deployment. Arranging for a suitable buffer might see some listed corporates tapping into the capital markets, but this may seem unjustifiably demanding and expensive for what’s required. Financing options in this context may appear limited but there is an alternative source that many Corporate Treasurers are yet to consider: Germany’s Schuldschein market.

Similar to a traditional bond but less expensive and administratively demanding for issuers, Schuldscheindarlehen (SSD), or promissory note loans, are privately placed instruments that do not need to be registered at a stock exchange. As such, while the market is recognised mainly as catering to unlisted mid-sized DACH-based corporates (German, Austrian and Swiss), it has been slowly attracting attention in recent years from much larger players. Not least among these are Germany-based household names such as Porsche, Lufthansa, Bosch and TUI, and non-DACH corporates such as Port of Rotterdam, Sweden’s Vattenfall, and French retailer Auchan.

Although Scope Ratings have reported that the Covid-19 pandemic has significantly disrupted SSD issuance volumes, it is predicting the final tally for 2021 placements to exceed 2020’s €19bn. This, it says, is being helped by a raft of debutant issues, many being oversubscribed as investor confidence in this niche market “remains high”. One successful inaugural issuer in 2021 was SITA –  the world’s air transport IT and communications network provider.

Cash drivers

SITA can be found in almost every country that has an established airport.  Owned by more than 400 airports and airlines, SITA currently still operates as a hybrid organisation, marked by the coexistence of not-for-profit and for-profit business units, making it a somewhat complex entity for investors to grasp.

That said, for Sottoriva, SSD has proven to be an excellent source of diversified financing. But then, it does present as a rather robust proposition. SITA has no immediate need for cash – it has a solid cash balance alongside established credit facilities with seven banks – and its own liquidity analysis reveals a cash buffer of up to two years.

However, while many firms would be delighted with this state of affairs, extending SITA’s buffer into the medium- to long-term (three to seven years in this case), and diversifying its sources of financing, was deemed prudent in a market environment that has hit the airline industry particularly hard.

“We decided to go to the Schuldschein because it is a private placement and offers us complete confidentiality,” explains Sottoriva. Indeed, unlike traditional bond issuance where all parties are informed, a Schuldschein placement invites only a select group of potential investors to participate. This club-like feel “was good for the moment” he says. Additionally, from an administrative point of view Schuldschein is less demanding than its closest cousin, the US private placement (USPP), and SITA wanted to leverage the familiarity and European ‘home advantage’ offered by Schuldschein for its debut issue.

First steps

In practical terms, the process, described by Sottoriva as “highly structured”, involved two banking partners: Société Générale, because it is close to SITA; and UniCredit because it has a strong presence in Germany. “We are a company able to self-fund, even during a very difficult period such as now. But we mandated the two banks to help us prepare a long list of documents to communicate our story to investors,” explains Sottoriva.

The story-telling aspect, he reports, is vital. As an unlisted firm, and therefore having no official rating, it was important to build a crystal-clear explanation of SITA’s complex business model, making sure investors had a firm grasp of its strong credit history, including how its free cash flow has doubled over the past five years.

From a banking perspective, Stanislas de Calonne, Senior Relationship Manager, Swiss Corporate Clients, Société Générale, says that despite the pandemic having seen “many banks closing the door on the airline sector”, SITA had already marked itself out as a strong client in terms of it being able to ride out the crisis. Alongside a continuous relationship of some 15 years’ standing, this enabled the bank to confidently offer its full support for SITA’s Schuldschein issuance.

It certainly helped that there was “a good team spirit” between the two banks and SITA, and it was this, de Calonne says, that assisted SITA “to succeed in the worst possible context”. A major part of this accomplishment was being able to explain the “special animal” that is SITA, with its complex business model and legal structure, to potential investors.

Indeed, before the first investor call, both banks were charged with building a detailed Issuer Profile. This 30-page document offered a bank’s eye view of SITA, exploring areas such as its 72-year history, its current strengths, competitors and market position.

At the same time, SITA also produced an Investor Pack, complementary to the bank profiles. This detailed its reasons for going to market, offering an honest view of how it has fared during the pandemic, and providing a flavour of its new three-year plan.

Alongside a view of the impact of Covid-19 on its financials, it also needed to explain how it can help the wider air transport sector restart and reshape. “This is a point of change for us as an industry; it gives us opportunities,” notes Sottoriva.

As a key software provider, he explains that SITA is ready with a number of advanced applications, including biometric touch-free tools to help airline passengers move through airports safely and swiftly. With strong financials and a robust sector recovery plan, the story for investors was compelling. On 26 January 2021, the first investor call took place.

To market

SITA is a USD-reporting firm but it was open to USD, Euro and CHF on its €75m Schuldschein launch. With mid- to longer-term plans, it presented options of three-, five- and seven-year tenors to the wide range of mainly institutional investors invited by the organising banks to virtually meet the SITA team.

Although the presentation was scheduled to be followed by a 15-minute Q&A, such was the interest that this eventually extended to the maximum 45 minutes. In fact, says Sottoriva, the detailed questioning kept coming right up until the book was closed on 23 February. Unsurprisingly, the issue was oversubscribed, SITA eventually raising €95m.

The issue has not only yielded immediate financing, but it has also enabled SITA to build new relationships with other potential investors. These include a number of banks which, while deciding not to take the Schuldschein route, have discussed opening new credit facilities for SITA.

“The great advantage of this process is that we have started being known in the market,” comments Sottoriva. It has also provided a valuable learning curve for possible future issuances (USPP has not been ruled out). “We know that building a good credit story, answering every question in detail, and going deep into our business model, were fundamental to our success in this market.”

The experience has also alerted SITA to the need to keep investors up to speed. Prior to its first Schuldschein issuance, it did not have an investor relations (IR) function, keeping a fairly informal exchange with existing investors. As Group Treasurer and Finance Director, Sottoriva was the key contact point for investors throughout the issuance process, and he soon realised that regular communication between parties is both useful and expected. SITA has now onboarded an IR specialist to maintain the vital flow of information.

Treasury to the fore

While Sottoriva describes SITA’s first Schuldschein issuance as “very positive”, he recalls that the pressure of response times for investor questions was quite intense, typically with a 24-hour turnaround on detailed and complex commercial and financial explanations. “You need to be prepared, fully dedicated and very open with your responses,” he advises.

With many investor questions naturally being business-driven, it was important for Treasury to understand and communicate the precise nature of SITA’s business model. The move into Schuldschein presented an opportunity for Treasury to undertake a rare deep dive into SITA’s financials, enabling it to unravel its longer-term planning and outlook.

One of the most pressing questions from investors, says Sottoriva, was how, given collapsing airline passenger numbers, SITA could survive financially. “By digging into our numbers we could explain the revenue drivers and margins, and communicate the strength of Treasury within Finance and across the organisation.”

There is no doubt that SITA’s debut Schuldschein issue has been a great success. It has enabled the company to create a significant buffer in difficult times which will enable the roll-out of new technologies that will ultimately assist the airline industry in getting back into shape as soon possible.

It has opened up new relationships with the financial community, and given the business the perfect opportunity to look in on itself and start reshaping and planning for its own future with a new and more open approach to stakeholders.

But more than that, it has set Treasury on a path marked by closer ties with the business. It has created a mutual understanding that can only be to the benefit of all. If SITA’s experience is anything to go by, Schuldschein is more than just an alternative source of financing.