Using bonds to finance the Mittelstand

There is an interesting new financing tool for small and medium size enterprises (SME) emerging in Germany: the bond market. A recent story in the Economist (Financing Germany’s Mittelstand: A crisis-born fledgling) notes:

Finding those hidden treasures, the mid-size mostly family-run companies–known as the Mittelstand–which power Germany’s export machine, is getting a little easier for would-be investors. That is because more of them are beginning to issue public bonds. In the past 12 months, four of Germany’s eight stock exchanges have started their own markets for Mittelstand bonds. The issue sizes range from €15m to €225m ($21m to $311m) and the competition between exchanges to attract the best names is fierce.

Traditionally, SMEs have been too small to tap into the bond markets directly. But the German stock exchanges have found a way to crack open capital markets for these companies.
As I pointed out before, the Mittelstand companies are in the business of selling their specialized knowledge. It would interesting to know if that knowledge is used in any way to collateralize those bonds. The article points out that the bonds are paying a coupon of 7% to 9%, “which is cheaper than many bank loans.” Given the risky nature of the market (as the story points out, “the issues are small and illiquid; there is no true market-making; and few of the issuers have a track record”) use of collateral would be a good idea.

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