Corporates, depending on their size and credit profile, have access to many sources of funding. These include bank financing loans such as bi-lateral loans, club deals and syndicated loans. However in addition to funding from banks, corporates tap the debt capital markets through the issuance of bonds, asset-based lending, securitisation and commercial paper. This article will discuss another funding source: private placements, specifically the (non-)existence of a pan-European private placement market.
The Private Placement Market
A private placement (PP), as the name suggests, is an exclusive transaction between a corporate issuer and investors. The loans in a PP transaction are often bonds or notes and the investors are typically a small group of selected non-banking institutions. PP markets in Europe have operated nationally, instead of being part of a broader European market.
Investors in the PP market are typically insurers and pension funds. According to the Association for Financial Markets in Europe’s (AFME) recent joint report with Oliver Wyman, entitled
‘Unlocking funding for European investment and growth’
, these institutional investors manage approximately €12 trillion-worth of assets (at the end of 2011), which represents approximately 75% of non-bank institutional assets under management. The investments of insurers and pension funds are driven primarily by the characteristics of their liabilities. Life insurer liabilities are typically long dated and predictable. They represent the largest share of total insurer liabilities. These investors naturally invest in bonds, which deliver long-term cash flows to match their liabilities.
The US has an active private placement market (USPP). Typically, different registered notes are offered to a small number of investors or a syndicate arranged by an investment bank. In some cases the notes are placed with a single investor in a bilateral deal. The notes normally have a fixed coupon and are denominated in US dollars (USD). Maturities range between three and 30 years. Issue sizes are flexible, ranging from US$15m to over US$1bn. Borrowers do not require a public rating, but the USPP notes are given a private rating by the National Association of Insurance Commissioners (NAIC). This NAIC rating is a requirement for USPP investors that are US insurance companies. The financial assets of these insurers need to be rated for regulatory purposes.
Because of the large number of insurers among USPP investors, the NAIC rating has a significant influence on investor appetite for the notes. The USPP market is also tapped by non-US companies.
According to the NAIC
, the market totaled US$54bn in 2012 and preliminary figures for 2013 show a figure of approximately US$51bn. More interestingly, US$32 billion of that (record) total in 2012 was raised by non-US companies. A large part of the non-US companies are European corporates looking for alternatives to insufficient bank funding. The private placement market is one of those alternatives.
In Europe, the most established PP market is that of Germany, where Schuldschein loans are one of the debt instruments used. Originally, the main issuers of Schuldschein loans were German public sector entities, but over recent years corporates have been increasing their presence in the Schuldschein market. German banks and insurance companies are the main investors, although the number of foreign investors entering the Schuldschein market is increasing.
Pan-European Private Placement Initiatives
The impact of the Basel III capital adequacy regime and limited availability of bank financing has been widely discussed. Much has also been written about disintermediation and the search for funding alternatives. These recent trends, coupled with the fact that European corporates are actively tapping the USPP and Schuldschein markets, deliver the ingredients to establish a pan-European PP market. Although European corporates raise debt through private placements already, those deals are often local transactions. Firms such as Zanders have recently been seeing a lot of initiatives throughout Europe to establish a standardised pan-European market.
In the UK, there are several initiatives to create a PP market. For example, in 2012-13, the Association of Corporate Treasurers (ACT) investigated the possibilities of a PP market specifically aimed at UK mid-sized companies. The ACT’s primary objective was to increase the number of UK-based PP investors, but it also wished to determine the barriers to and solutions for the development of an active PP market.
At the end of February 2014, Britain’s largest pension fund manager, Legal & General (L&G), announced that it wanted to start investing in medium-sized UK companies. The pension fund manager would focus on private placements which allow companies without access to public debt markets to borrow by issuing loans as low as £20m with maturities of up to 10 years. L&G joins M&G (the investment company of insurer Prudential), which is already active in the UK private placement market. Other major company pension funds, such as BAE Systems, together with other insurers such as Generali also show interest in private placements.
In January this year, the Loan Market Association (LMA) announced that it is working on the development of standardised private placement loan documentation for Europe. The LMA is recognised in the market as a provider of standardised loan documentation – historically originated to assist the development of a secondary loan market in Europe.
France is also a good example of where we see an increase in PP market activity. As recently as a couple of years ago there was almost no PP market at all in France, but now borrowers have raised more than €7bn. Adding fuel to the development of a PP market, French financial specialists have recently developed a ‘Charter for the Euro Private Placement Market’. This document outlines their views on industry best practice. They are also on the verge of announcing that the French financial markets regulator, the Autorité des Marchés Financiers (AMF), will exempt PPs from France’s stringent market sounding regulations. This potentially makes it easier to raise debt through PPs.
In the Netherlands we are seeing initiatives similar to those in France. Dutch banks and insurers are working on a plan to develop a European market for PPs and there is a very broad Dutch initiative to establish a pan-European private placement market. Bank financing has been a favorable funding source for Dutch corporates and SMEs. Especially before the credit crisis, Dutch banks were quite active in financing Dutch businesses. However, due to bank bail-outs by the government and new regulation, an alternative is needed.
In our firm’s view, a pan-European private placement market would be very much appreciated. A more efficient financing landscape could potentially fuel economic growth in Europe. Given all the initiatives in the different countries (of which only a few are discussed here) it makes sense, but a few barriers remain.
One obstacle is the local differences between European countries. That is why Zanders highly endorses the intention of the Loan Market Association (LMA) to produce a template for European PP transactions. The firm believes that a standardised PP document will boost the development of the pan-European PP market. Zanders is an associate member of the LMA, which enables it to keep a close eye on the organisation’s developments. It seems there is strong momentum for the development of the European private placement market. Hopefully we can take advantage of the momentum and further enhance an efficient financing landscape to boost European economic growth.
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