Schuldscheindarlehen – Bridging operational gaps via outsourcing

Published on October 14, 2025 by Heli Amarakoon

Banks, in addition to insurance companies and investment funds, are the primary investors in Schuldschein loans (Schuldscheindarlehen [SSD]). Although the instrument has traditionally suited high-credit-quality borrowers, currently the market is dominated by unrated or non-investment-grade issuers. As a result, banks play an increasingly critical role in underwriting, credit analysis and operational execution, bringing structure and consistency to a largely bilateral and unregulated market. However, as transactions grow in complexity and international in scope, execution risks are increasing, with operational blind spots becoming more apparent.

Operational roadblocks in Schuldschein execution

Cross-border regulatory complexities

Schuldschein loans, governed by German law, fall under the jurisdiction of German courts, either on an exclusive basis or on a one-way exclusive basis, where borrowers must litigate in Germany while lenders have broader rights to sue elsewhere. German law is valid and binding even for foreign issuers.

However, when deals involve international parties, operational compliance becomes more challenging, due to the different interpretations and applicability of laws across jurisdictions. The parties must verify how a law is treated in a certain jurisdiction, as cross-border transactions entail diverse interpretations of securities, tax and licensing laws. To avoid triggering complex legal regimes, issuers and investors must carefully structure and market SSDs.

Operational complexities

Capacity constraints from operational workload

Schuldschein loans are inherently bilateral and not syndicated. Even when multiple lenders participate, each lender directly signs an agreement with the borrower. No collective loan agreement is binding on all the lenders, and the agent or arranger in a Schuldschein represents the borrower.

Owing to the lack of representation of lenders, each Schuldschein loan requires separate contract administration, adding to the burden on operations and middle-office teams. Managing a portfolio of bilateral loans without agents increases complexity. Lenders are individually responsible for monitoring covenants and compliance, and the absence of centralised reporting makes it difficult to track overall portfolio performance. In addition, interest and principal payments must be tracked independently, with borrower communications handled separately for each loan.

Restructuring difficulties

The lure of higher returns has prompted the SSD market to welcome high-risk borrowers, exposing the product to potential financial restructuring. Furthermore, the bilateral nature of SSDs poses risks to lenders, due to the lack of collective decision-making. Unlike syndicated loans, there is no concept of majority lender votes for amendments, waivers or enforcement, making restructuring slow and complex. Each lender must independently negotiate with a borrower for consent or waivers, whose outcomes can vary. Also, banks manage corporate actions (such as early redemptions or enforcement) individually, and each lender holds individual rights and responsibilities, including the right to terminate its portion of the loan.

Nonetheless, despite the absence of a formal lender representative, arranging banks often step in as de facto coordinators to facilitate communication, distribute documents and assist with post-issuance coordination, acting as an informal conduit between themselves and a borrower.

Lack of standardisation in documentation and structuring

The flexible and short Schuldschein documentation can pose challenges during financial distress. Key terms may be opaque, especially in bilingual agreements where translation can lead to misinterpretations. Although the LMA has introduced non-binding templates to improve consistency and cross-border use, Schuldschein documentation remains less standardised than syndicated loan agreements. As no central authority oversees updates, the structure can vary widely across arrangers, especially in international, ESG-linked or customised deals. Schuldschein loans also lack public transparency and disclosure requirements, as they are not classified as securities under German law. Hence, they are exempt from prospectus rules and other regulatory disclosures. This limits secondary market liquidity, as investors have little access to verified information outside original loan documentation.

Inefficiencies in manual transfer processing

SSDs are transferred manually through bilateral agreements between a borrower and each lender. There is no centralised clearing system such as Euroclear or Clearstream. The paying agent facilitates direct payments (interest and principal) from a borrower to each lender and sends notifications. This manual process could stretch settlement times. Besides, mismatches in payment instructions, document versions or corporate actions may delay disbursements and increase operational risks.

Onboarding domain experts

SSD’s appeal lies in a streamlined issuance process, minimal disclosure requirements and flexibility in structuring deals tailored to diverse investor needs. Additionally, pro forma agreements and mark to market reporting exemption reduce complexity and volatility, making SSDs an attractive, discreet funding solution. However, some of these features present challenges to banks as the market expands to cover more international and crossover borrowers. Banks can manage these risks and maintain efficiency without compromising control by seeking the support of a third-party agent (TPA) in the following key areas:

How Acuity Knowledge Partners can help

We have nearly 20 years of experience in supporting global banks across the loan life cycle, providing bespoke solutions to above 90 banking clients in the retail, business, middle-market, real estate and leveraged finance segments. Leveraging our deep domain expertise, multi-platform proficiency across loan management systems and extensive experience in serving credit institutions, we offer end-to-end support across the Schuldschein life cycle.

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About the Author

Heli Amarakoon

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11+ years of experience in Banking and Financial Services industry. At Acuity Knowledge Partners, she has been operating as a Team Lead in the TMT&H sector of a large European Bank conducting covenant monitoring, financial spreading, internal risk rating and analytical credit review writing. She is currently supporting to setup Loan Operations in Colombo. Prior to joining Acuity, she worked in a leading Commercial Bank in Sri Lanka conducting credit risk analysis, financial analysis, client relationship and portfolio management. She holds a Master of Business Administration from the University of Colombo and Bachelor of Business Management (First Class) from Bangalore University.