Gerry Weber filed for insolvency proceedings last Friday after a standstill agreement for the repayment of a Schuldschein tranche in November 2018, which would be classified as a “selective default” by a credit rating agency. The insolvency follows the failure of discussions with financing counterparties, though it has not yet been specified whether this related to financing banks, the holders of Schuldschein loans or lessors.

“The onus on investors to undertake sufficient due diligence is important for the Schuldschein market in order to ensure that the experience of issuers such as Gerry Weber remains an exception,” says Sebastian Zank, analyst at Scope. Given the limited liquidity of the private debt product creditors cannot exit an investment in SSD debt as easily as they would be able to with publicly traded corporate bonds, says Zank.

The troubles at Gerry Weber come as issuance on the SSD market is set for growth this year (see Scope’s 9 January report) after total issuance in 2018 of around EUR 24.5bn was nearly 10% short of the previous year’s EUR 27bn though the number of transactions held steady at 150, according to Scope analysis. Troubles at two big former SSD issuers refocused investor attention on credit risk in H1, cooling issuance and investor appetite, with only EUR 8bn issued before a strong H2 rebound.

Gerry Weber had issued two Schuldschein loans totalling EUR 215m shortly after one another in 2013 and 2015. The second SSD transaction of EUR 140m was used for the acquisition of Hallhuber (including the repayment of Hallhuber’s EUR 30m SME bond (‘Mittelstandsanleihe’) – a company which turned out to be a major drag on Gerry Weber’s consolidated accounts.

“Schuldschein loans represented Gerry Weber’s core pillar in its financing mix besides the usage of operating leases,” says Zank.

Gerry Weber’s financial position looked solid at the time of the issuance of the first Schuldschein loan (Scope adjusted leverage – measured as Scope-adjusted debt/EBITDA – of below 2.0x), but it deteriorated quickly, particularly following the Hallhuber acquisition, amid increasingly difficult trading conditions in the fashion and retail sectors as sales shift increasingly to online retailers from bricks-and-mortar stores.

In addition to Gerry Weber, recent Schuldschein issuers facing financial trouble include Greek jewelry supplier Folli Follie, U.K. construction firm Kier, Austrian pharmaceutical company Sanochemia and Swiss bakery company Aryzta.