The financial world is still living with the fall-out from the 2008 crisis in the form of reduced volumes of bank lending as well as diminished returns from both bank deposits and bond yields.
It is therefore perhaps not surprising that increasing numbers of European companies, and in particular those in the mid-market sector – with annual revenues of between €100m and €1.5bn – are seeking alternative sources of finance. In this respect, issuing debt on the pan-European private placement (PP) markets, or the German “Schuldschein” market, are increasingly popular options. In addition, rising numbers of investors are using these direct, private debt issues to diversify their portfolios in search of higher yield.
In fact, the total volume of private placement deals for companies in Europe grew from €18.4bn in 2014 to €32.8bn in 2015 – an impressive 78% increase. Of this total, €14bn was issued on the pan-European PP markets, which includes French Euro PP issuance and PPs arranged across the rest of Europe including the UK. The remaining €19bn was issued on the Schuldschein market.
Yet this may be just the beginning of a wave of growth to come. While these European markets may have been disadvantaged in the past when compared to the USPP market – due to the multiplicity of legal systems, tax and regulatory regimes in force across Europe – initiatives are now underway to bring greater harmonisation of standards, best practice and documentation. This is likely to encourage a wider investor base, although improving transparency around credit risk should also help in this respect.
The emergence of European PP markets
Looking more closely at the figures, volumes across pan-European markets (including agency and direct deals) grew to €13.8bn in 2015 from €7bn in 2014, with the total number of deals increasing to 162 from 94. In 2014, there were only eight deals larger than €150m, amounting to €1.8bn in total. This number increased in 2015 to 21 deals totalling €6bn.
Two of the largest deals were done by Spanish supermarket chain Hipercor SA (€600m) and Italian airline Alitalia (€375m). With respect to smaller deal volumes of €50m and below, the total number of transactions in 2014 stood at 33 with a total volume of €0.8bn. In 2015, total deals increased to 68 with a total volume of €1.4bn, of which almost half were below €20m, indicating a clear expansion of smaller companies looking for alternative financing sources.
Meanwhile, volumes in the German Schuldschein market surged in 2015 by 65% from €11.5bn in 2014 to €19bn in 2015, with the total number of transactions rising from 95 to 104.
While traditionally transactions under €200m form its backbone – accounting for over 70% of all deals (75 transactions) in 2015 – there is currently an additional trend for increasing numbers of smaller companies to issue here, with 40% of all first-time Schuldschein issuers in 2015 having annual revenues of below €1bn.
More than half of all deals in this market were mergers and acquisitions (M&As), with average deal volumes rising from €120m in 2014 to €180m last year. Examples included automotive parts manufacturer Friedrichshafen AG issuing private debt worth €2.2bn; filter systems manufacturer Mann & Hummel issuing debt worth €1.1bn, and specialty glass and plastics manufacturer Gerresheimer’s debt worth €425m.
Drifting away from the USPP
Undoubtedly, alternative financing markets in Europe are growing at the expense of the more established USPP market and classical bank financing.
Indeed, deal volumes in the USPP market for cross-border Europe transactions peaked at about €20bn in 2012. Ever since then they have declined; to €17bn in 2013, €16bn in 2014, and €12bn in 2015, when the market lost its lead over its European equivalent markets.
The highest fall in USPP deal volume among European companies in 2015 was attributable to UK and Ireland companies, which completed transactions amounting to €11bn in 2014, but only €8.6bn in 2015. Another clear example of the USPP activity decline is that in 2015 only one French company issued via this route, whereas in 2014 there were four, including a large deal worth US$1.1bn for business service firm Sodexo. As European private placement markets open up for larger issuance volumes, it seems likely that future deals like Sodexo’s will be issued in the European markets rather than in the USPP market.
The market’s attractions
So why are we seeing such a great increase in PP activity across Europe? PPs can be cheaper, quicker to put in place, and more flexible for those issuing than preparing an initial public offering (IPO), or going to the public bond markets, and leave them free from the more onerous reporting requirements of those markets. This correlates with the lacklustre performance of the alternative European bond markets, where volumes dropped by 20% in 2015 to €2.4bn.
PPs can also come with longer maturities than bank debt or bonds, which may be an additional incentive for some companies. The pattern of PP deal volumes certainly seems to signify an appetite for longer maturities. The volume of deals with maturities of below five years dropped from €0.8bn in 2014 to €0.5bn in 2015 (from 13% to 4% of the total), with the volume of those with a tenor of 11 to 15 years rising from €0.1bn to €0.8bn.
As banks refocus their core businesses in line with changing regulatory and market environments, investors are looking toward both smaller and larger companies and lending tickets in these markets in their search for yield.
Due to the higher risk traditionally associated with funding smaller companies, these types of investment can offer attractive yields, which may help improve investors’ financial performance and diversify their portfolios. All told, it is not hard to understand why both borrowers and lenders are choosing privately placed debt.
While the market for PPs is growing, more can be done in terms of harmonising standards and improving transparency. Initial moves have already brought a higher degree of clarity and unity to these markets.
These include standardised PP transaction documentation based on English law (drawn up by the Loan Market Association (LMA)) and the equivalent based on French law (drawn up by the Euro PP Working Group), as well as the Pan-European Private Placement (PEPP) Working Group’s Pan-European Corporate Private Placement Market Guide, which also contains a framework of best practices for PEPP transactions. Further movement in this direction would help broaden the investor base in these private debt markets still further.
However, most importantly, investors require a better understanding of smaller, therefore riskier, investments. Transparency around creditworthiness – based on a cost-efficient system of credit screening and analysis – would support an efficient due-diligence process and price discovery across a more and more diverse European investor base, helping investors to better allocate their funds.
If the current trends continue, it is possible that the pan-European private placement markets will ultimately become the primary destination for mid-sector companies trying to raise finance, and those willing to invest in them. Right now, these markets are in the ascendancy, with impressive growth and bright prospects.
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