Private Placements: the Case for a Pan-European Market
Whatever the drivers behind the trend – whether they be commercial, regulatory or political – non-bank lenders are now showing an increased interest in lending to corporates. What’s more they are lending to them in a variety of different ways, and across a number of different sectors.
One such method, by which non-bank investors are entering Europe’s corporate loan market is via private placements. What exactly are private placements though and how do they fit within the corporate financing toolbox?
In brief, private placements are medium- to long-term financing transactions entered into between a listed or unlisted company and a small number of institutional investors. Documentation is very much deal-specific and negotiated on a case-by-case basis between the borrower and investors, occasionally with the participation of one or more bank intermediaries as arrangers.
The European private placement market is steadily growing in size, but remains fragmented. In France the private placement market totalled €2.88bn (£2.11bn/US$3.26bn) in 2014, slightly down from €3.1bn in 2013 according to Thomson Reuters. Similarly, the UK private placement market is on the rise, with a total estimated at between £3bn and £6bn raised over the course of the past three years, according to Standard & Poor’s (S&P) estimates. Private placements are also cited as being increasingly common in other parts of Europe, including Italy, Spain and the Central and Eastern Europe (CEE) countries, although market data is difficult to obtain for these countries, due to the private nature of the underlying transactions.
Although the market is on the rise there are still challenges, such as a lack of clear and transparent market data. The lack of a universally-accepted definition of a ‘private placement’ is also an obstacle. Is it simply a type of private financing arrangement provided directly to a borrower by a non-bank investor? If so, what sort of borrower? Some will say investment grade. Others will say SME fundamental grade. Is Germany’s traditional Schuldschein loan a type of private placement or an entirely different product? Is a private placement a loan or a bond? Should it be rated? Should it be listed? The list of questions is seemingly endless, due to the fact that in recent years different types of people have been doing different types of transaction – yet labelling them under the same umbrella term.
Despite the fluid definition, however, there remains a clear desire among issuers and investors to widen and diversify the private placement market. One way of doing this is via the production of standardised documentation, which, in turn, can diminish the challenges cited above. As standardisation takes hold, participants begin to operate under a recognisable framework. This then leads to greater availability of market data in respect of deals completed under that framework, improved transparency and less fragmentation between markets.
The LMA Private Placement Documents
In answer to the need for standardisation, early this year the Loan Market Association (LMA) launched a suite of
template private placement documents
, publishing both a loan and bond format (along with an accompanying term sheet and confidentiality agreement).
The documents are based on existing LMA loan templates, and as such will be immediately recognisable across the market, particularly by corporate borrowers. In addition, the note version of the document follows the loan version, save to the extent necessary to incorporate any structural variations between the two – it being felt that this would help to establish private placements as a unique and recognisable product in their own right and without any opportunity for format arbitrage.
The Future for Private Placements
Whatever the challenges, non-bank lending is clearly on the increase and private placements are likely to benefit as a result. Admittedly, in the European market it seems unlikely that non-banks – whether insurance companies, debt funds or pension funds – will ever find themselves in a position where they have the majority share of the corporate debt market.
Firstly, banks continue to have sizeable origination platforms and a strong regional presence. They are able to offer borrowers a full suite of banking facilities, including revolving capital facilities – the monetary lifeline for any business. These products are typically unattractive to institutional investors, as they require significant levels of infrastructure and administrative capacity and are not suited to an institutional investor’s funding model.
Secondly, many borrowers remain drawn to the relationship lending model that banks provide, as well as the advantages that a bank’s ability to provide ancillary services bring – not least of which is a lower price of debt. Yet despite this, non-banks are establishing a foothold in the debt markets and private placements may well be one of the tools that enables them to flourish.