Thursday, 18 October 2018

IFR Private Placements Roundtable 2015: Part 1

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IFR: Welcome to IFR’s inaugural private placement roundtable. Private placements have received a lot of attention of late: from the perspective of moves towards Capital Markets Union in Europe; and as a result both of market conditions brought about by monetary stimulus and liquidity conditions  brought about by regulation.

I wanted to kick off with a very general question. When we say private placements, what are we actually talking about? Bearing in mind we have US private placements, Euro PP, Schuldschein, German and UK private placements; direct non-bank lending (which some people refer to as private deals); and issuance under MTN programmes, it’s not altogether obvious if there’s an accepted definition. We also have unlisted and listed securities; syndicated and pre-placed transactions. Stuart: what are your thoughts on this?

Stuart Hitchcock, NYL Investors: My definition would be an unlisted, unregistered, long-term, buy-and-hold commitment specifically out to one or more institutional investors in bond format. That’s probably as simplistic as I could put it. It would not include, at least in my eyes, issuance under EMTN programmes. Maybe they’re quasi-PP. I also wouldn’t include Schuldschein – a German bank style of financing under short bond-style documents – as traditional PP.

Alain Gallois, Natixis: I think there are two definitions: a legal one where issues are pre-placed before launch; and public transactions which are distributed through retail through what in French is called an offre au public, so a public offering like we also have in the US and Europe. For the bulk of the market, private placements are non-liquid, small sized, confidential transactions placed with a small number of buy-and-hold investors.

IFR: Can they be listed?

Alain Gallois, Natixis: They can be listed or non-listed, as this market is also open to loan format. Today, what we have developed with the Euro PP market is mainly a listed market, something quite transparent, in contrast to the Schuldschein market which is more a non-listed market.

Stuart Hitchcock, NYL Investors: In terms of the size, just to define what I would describe as a PP, it can be anything from US$20m equivalent anywhere up to US$2bn and in terms of the investors, the number isn’t really a huge factor. We can see it bilaterally all the way up to 25–30 investors. That would be the kind of range that I would typically see in a PP.

IFR: Richard, where do Schuldschein fit into this, from the perspective of a strict definition of private placements?

Richard Waddington, Commerzbank: I think we all have our own views on what they are, but one of the common threads [of private placements] is that they’re non-liquid instruments issued by unrated mid-market corporates and sold to buy-to-hold investors. Each of the different products you mentioned in your introduction is coming at it from a slightly different angle but, ultimately, I think the key threads are: unrated credit, non-liquid, buy-to-hold investors.

Tenor-wise it varies, the Schuldschein market doesn’t go as long on the whole as the USPP market; it’s more in line with what you see in the Euro PP market in five, seven, to 10 years for unrated corporate credits. Schuldschein can have much longer tenors but these aren’t what I classify as private placements; they’re more akin to public issuance by German issuers.


IFR: On issue size, bearing in mind Stuart’s mention of USPP issues up to US$2bn and bearing in mind ZF’s recent €2bn Schuldschein, where does that leave Alain’s definition, about issues being pre-placed, since these are syndicated.

Richard Waddington, Commerzbank: ZF was an anomaly, albeit a very interesting anomaly. It hit the sweet spot in the market, launching at €300m and blowing out at €2.2bn. That was a combination of attractive pricing, and the right credit with the right profile. But it was a broadly syndicated placement, so I wouldn’t classify that as the traditional private placement type route for normal Schuldschein, Euro PP or US PP.

But like US PP, in Europe, they can also get big issues as well. Hitting US$1bn is at a large scale, but it can be done. We’ve seen very big issues in Euro PP as well. In summary, there are anomalies for all the products.

Richard Waddington, Commerzbank: ZF was clearly an anomaly albeit a very interesting anomaly. It hit the sweet spot in the market, launching at €200m and blowing out €2.2bn. That was obviously a combination of pricing, the right credit with the right profile but it was a broadly syndicated placement so I wouldn’t classify that as the traditional private placement type route for normal Schuldschein, Euro PP or US PP. But like US PP, in Europe they can also get big issues as well. Hitting US$1bn is at a large scale but it can be done. We’ve seen very big issues in Euro PP as well. In summary there are anomalies for all the products but they do happen.

Alain Gallois, Natixis: To come back to Stuart’s point, we love big private placements; we prefer to work for US$2bn than US$20m.

Emilie Wong, ING: From our perspective, what we call private placements is funding by an unrated SME. We are seeing more cross-border activity, so fewer French SMEs coming to the Euro PP market, and more diversification. For us private placements are tailor-made financing solutions conducted under the radar to a few selected investors.

What we would call private placements is anything from €50m up to probably €500m. which we’ve seen in the market from some French SMEs. But most importantly, it has to be under the radar and tailor-made broadly in a maturity range of five to maybe 10 years. So clearly they’re not publicly announced and there are no big roadshows. They’re bilateral discussions with between one and 10 key investors per transaction.

IFR: Nick, let me come to you. You chair the Pan-European Private Placement Working Group. I imagine these sorts of existential questions came up in your deliberations.

Nicholas Pfaff, ICMA: The answers so far illustrate the problem that when you refer to a private placement, there’s a diversity of views and a diversity of products. The wider issue is that you can privately place any type of security, so it’s also a technique. When you try to turn it into a product, you have to make an effort to define it both in terms of what it is currently in the European market and also perhaps what it can be if we’re going to turn this into a bigger market.

Indeed, in the efforts that we made in the Pan European Private Placement Working Group, we spent a lot of time on definitions and we have one which I’m glad to say generally covered what was discussed, although we emphasised the unlisted aspect of the market.

IFR: On that specific point, when you see a stock market [i.e. Euronext] launching a private placement segment, what do you think about that?

Nicholas Pfaff, ICMA: As Alain said, the Euro PP market has developed as a listed market because of a constraint in the French insurance code (Code des Assurances). That has since been lifted so there is a trend now away from a market that has historically been predominantly listed to one that today is roughly half-half between listed and unlisted transactions. Euronext has indeed launched a product to serve the listed component.

I think we need to see how the market reacts to that. It may well be that the market would want to preserve a listed component of the privately-placed market. It doesn’t make our definitional efforts easier, but I think we need to retain an open mind, while at the same time recognising that if you step back from the Euro PP market, generally one of key characteristics is it’s an unlisted market.

Stuart Hitchcock, NYL Investors: What is a Euro PP? The name gets bandied around a lot but from a third-party perspective, it’s a bit of a strange one because it seems as though there are a lot of local markets that have always been there. The French market has done a very good job recently of expanding issuance for certain types of issuer, but we’re not talking Pan-European PP. What’s the actual definition of that?

Alain Gallois, Natixis: The initiative came from the domestic French market, which saw its initial transaction in 2012. Why? Because on the one hand something like 20% to 25% of the euro corporate market is made up of French issuers and we’ve seen a lot of potential with SMEs. On the other hand, there’s a real drive from big investors in France who are seeking diversification, new names, yield pick-up etc. Some investors, particularly the big insurance companies and asset managers said: “I want to go into non-liquid, non-rated small caps that have a nice story; my buyside analyst can do the credit work and I can take €20m-€30m out of a €60m trade.”

That’s Euro PP. After that initiative, the Pan-European Working Group was convened to try and build from the values of the French and create a real European market which does not exist even if in the Euro PP market we’re now seeing more non-French issuers and non-French investors coming in, particularly since the beginning of 2015.

Jason Rothenberg, MetLife Private Capital Investors: Where do the non-French investors tend to be from?

Alain Gallois, Natixis: You have UK guys, the Swiss, Belgium, Italy and it’s mainly funds, asset managers, some life insurance, private banking and some banks.

IFR: Jason, let me come to you. Given your focus on the USPP market, are you bemused by the amount of the noise emerging in the past year to 18 months around European private placements and the fact that we’re actually having the conversation of what private placements are, given that’s pretty clear in the US?

Jason Rothenberg, MetLife Private Capital Investors: It is pretty clear in the US PP market. The discussion highlights that there are a lot of differences between the various markets you mentioned; the Schuldschein market which has been around for quite a long time and the Euro PP market which is newer. But in terms of the types of companies that approach the space, the typical maturity, the typical credit quality or the size of the deals, it’s different in each market.

One of the things I think about when I think about the definition of private placements is that each deal is privately negotiated, so in most cases we start with a template. In the US PP market it’s the model form of the note purchase agreement but there’s an opportunity to negotiate some of the key terms of that document.

We’ve had people call us occasionally and say they’re doing a ‘private placement’ and announcing it that morning and needing to take bids that afternoon. That, in my mind is certainly not a private placement because private placements involve a certain amount of credit analysis and negotiation of documentation.

The process is part of that definition. To clarify one more point, I think about 30% of the deals that get done in the traditional US PP market are rated companies; it’s not just for unrated companies but for rated companies that want to diversify their sources of financing in a different market.

IFR: On the point about privately negotiated transactions, how private can it be if there are 10 of you involved in the negotiation? Are bilaterals the sweet spot or are you happy seeing others in there?

Jason Rothenberg, MetLife Private Capital Investors: We’re happy to work however the issuer prefers to work. Issuers have the option of doing a broadly marketed agency transaction, which is much of what we do. They can also put together a smaller club deal or they can work bilaterally with just one investor.

In terms of the negotiation, there’s an opportunity, even on the broadly marketed deals where there’s a number of investors, to provide feedback on suggested term changes or things that we’d like to see in order to be able to get more comfortable with the deal.

These things get fed through the agent back to the company and the company’s counsel, and often they are included in the deal, so there’s always an opportunity to influence the structure.

IFR: How open is that process? If you’re providing feedback through the agents or through counsel, do you have a sense of what other counterparties in the trade might be proposing?

Jason Rothenberg, MetLife Private Capital Investors: No. Typically that would just go back through the agent and the agent might tell us if other people are asking for the same things or not. It is not a situation where we’re talking to other potential investors at the same time.

IFR: Stuart, would that jive with your experience?

Stuart Hitchcock, NYL Investors: Absolutely. The issuer is the focus and it’s a privately negotiated deal. The only thing I would add to Jason’s comment: because it is negotiated, because it is flexible, it’s open to all manner of types of financing or credit so it can be investment grade, sub-investment grade, project, infrastructure, unsecured, secured, public, private, it can be covenanted, it can be uncovenanted with a most favoured lender’s clause only.

The flexibility of the document that we have and the ability to negotiate it and offer it out to both small companies and also the largest and biggest and even the big rated companies allow it to be totally flexible.

Calum Macphail, M&G: Going back to the point about why the focus has been so much on Europe over the last 12 to 18 months, there has been great desire to see European corporates – which historically have been very reliant on banks – transition to a more balanced funding model. You’ve seen that in the public markets where corporates have increasingly gone and issued public bonds. The drive towards private placement markets in Europe is about trying to bring that down to the next size of company and create a funding menu for them that goes beyond simply bank funding.

IFR: So here’s my political question. To what extent, bearing in mind the work of the Pan European Private Placement Working Group that you also sit on, are you being forced by the public policy agenda to create supply and demand for something that isn’t really there?

Calum Macphail, M&G: As an investor we’re always interested in investment opportunities and growing the pie of where we can go to. Diversifying those opportunities has to be a good thing. What you call the market to some extent is irrelevant. If it’s a good company that we get the opportunity to lend to, why wouldn’t we be interested?

Ash Shah, Barclays: From the standpoint of a bank operating and trafficking in the market, we look at all the companies that prospectively want to issue, whether they’re rated or unrated but particularly – as Calum points out – some of the guys who this initiative is targeted at: the small and medium size enterprises that almost by definition will be unrated and which will want to do an unlisted offer because their costs are lower.

We can’t be doing listed deals because investors want to do them. The issuer has to pay for it so an unlisted option is important to them. If you think about that, there are plenty of corporates that need funding across Europe. If you look at our corporate bank, which manages many of these type of corporate relationships, we have no shortage of enquiry around that.

I think Calum’s point is right in that the US PP market has done a terrific job of trying to fund some of those but there’s still a stratum of company that doesn’t get access to that market. I’m talking about ones that tend to fall even beneath what the US PP market tends to be good at.

There are size biases or industry biases or whatever it might be. That’s not to say the US PP market can’t get there; it certainly can, but if we can promote other investors into what is functioning already, everyone’s better off, issuers and investors. And we’ll be doing our bit for the political world too.

FTSE 250 companies have access to a perfectly good US PP market which also can incorporate European investors and often does. But does the FTSE 350, does the next layer down have access to capital when banks have broadly retreated and are unlikely to go back and fund those companies? That is the question we don’t know the answer to but if as a community we can develop something, it will have broad take-up.

Richard Waddington, Commerzbank: If you look back over the last four or five years, unrated corporates didn’t have that many options. There were either bank loans or US PP. What you’re seeing here is the growth and development of the market, and obviously there’s political support for it.

But the issue is: even though we’re trying to push for a more unified market, I think the market is always going to remain fragmented to a certain extent in Europe because of the different legislation, different regulatory bases and different investor bases.

It’s important to try and harmonise it, but you can only get so far. It’s a journey we’re all on. The US situation is more straightforward, they’ve got more standardised documentation. It will clearly be negotiated but, at the end of the day, you’re working with one law and there’s a much deeper investor base. We haven’t got that in Europe.

It’s developing, though, and it’s going to be interesting to see where we come out. We’re all trying to pull in the same direction in terms of getting more liquidity, and more issuers in the market, but the fragmented nature of the market means that the European Market is unlikely to develop in such a homogenous way as the US PP market.

Calum Macphail, M&G: I slightly disagree with Richard. There’s an element of truth in what he says but we just don’t know and I agree it is a journey. But we have to remember that the US market has also been on a journey to get where it is today and it has got a longer history that is not supporting the European market at this point in time. Therefore, to expect them to become comparable is a bit unfair.

IFR: Brian, let me bring you in on this one. Is the effort and industry being expended on the development of a pan-European private placement market a waste of time? Should we not be focusing on morphing the US private placement market to accommodate the different issuers in the market, given its standardised documentation?

Brian Bates, Morrison & Foerster: I don’t like to use the words ‘waste of time’ because any time we’re trying to expand the markets, allow more investors, bring more investors into the market, make the market available to more issuers, that’s always a great exercise.

What I do find unhelpful from an issuer’s perspective is the fragmentation we’re talking about. I think a lot of this has to do with the desire for participants in the market to create new products so they can have an avenue for their investment or for their law firms to be involved in a market they’re not particularly adept at right now.

Creating new products for those reasons isn’t particularly helpful. To Ash’s point, we’ve been trying for years to get a lot of European investors involved in the USPP market and that’s been more and more successful over time. I wish that would be the focus of the exercise. I wish the focus of the national governments would be to recognise that we already have an existing set of documentation that has survived the worst financial crisis since the Great Depression.

Although it’s technically an illiquid market, it actually isn’t illiquid. That would benefit European investors as well. From the issuers’ perspective, it’s just simple economics; the bigger a market is, the more competitive it is and the better pricing and terms you will get as an issuer. So fragmentation I don’t believe is helpful, but it’s not a waste of time to try to grow other alternatives.

Calum Macphail, M&G: Isn’t it a question of segmentation rather than fragmentation, and saying that the US market has historically only been willing to fund one stratum of company?

Brian Bates, Morrison & Foerster: Calum and I have been on so many panels together, I feel like we’re the siblings who can never agree. I think the term ‘US private placement’ is completely outdated. For years now, half of the market is non-US issuers and, even though it’s smaller than we would like, a significant portion of the market is non-US investors.

I coined the phrase ‘global private placement market’ and I really believe that the so-called US PP market is a global private placement market. We do deals in Asia, Europe, the US, Canada, South America, Australia, wherever. If that’s not a global private placement market, I don’t know what is.

Private, by the way, has nothing to do with the mechanics that people have talked about so far today; it’s the fact that the security, whether debt or equity, is not intended to be placed with the general public. The other elements that have been brought up are mechanics.

IFR: Emilie, whether you call it segmentation or fragmentation, are there benefits for issuers? I ask because it strikes me if the various markets are at different points in their cycles, issuers may get better execution in one segment than another.

Emilie Wong, ING: Fragmentation has benefited some investors massively. It’s worth pointing out also that some jurisdictions are more flexible in terms of covenants. Some investor bases can do Euro PP without any covenants, while others need to have them. Fragmentation also helps the issuer because they can pick and choose depending on the size they want to raise.

Some markets, for example, will not allow you to raise €500m. If you don’t have some key investors from certain jurisdictions like France, you’re most likely not going to raise €500m in the Euro PP market. If, however, you’re a family-owned company, if you want to avoid disclosure but you are aiming to raise €50m–€100m you can pick and choose between markets and be more flexible.

At this stage, fragmentation may also lead some investors to take advantage of the flexibility allowed by less harmonisation and push for bilateral deals, to get better allocation, to grab assets they want to access for diversification purposes.

Ash Shah, Barclays: If you look at how the deepest pools of capital in the world have developed, they’ve developed through becoming homogenous. Look at the Eurobond market. It’s developed into a multi-trillion dollar market because it’s homogenous. Look at the public dollar market, the deepest pool of capital in the world because it’s homogenous. If we’re going to try and galvanise investors and issuers to develop a pan-European market, let’s not talk about UK investors and UK issuers, French issuers and French investors; it’s about being pan-European. And you need to get some level of homogeneity into documentation.

I think Brian’s point is right which is if you’ve got a whole stratum of companies, French, Italian, UK, Australian, wherever they are in the world, that are already doing deals on a broad set of common terms with a few adaptations as Jason mentioned, that’s already found a base of issuance.

What really needs to happen – and Calum and I agree on this – is that investors need to be challenged on funding to do deals for the stratum of company that doesn’t have access to that market even now. It is the key. At the moment we’re doing deals for the FTSE 100, FTSE 250, DAX 30, CAC 40.

But what about the next layer down and the next layer down? What governments are challenging us to find is a solution for is small and medium companies. If we go to a small company with a treasury team of one with 10 funding options they’re never going to be able to sensibly sift through all of those options. We need to provide something that genuinely is broadly uniform with adaptations as are necessary for that issuer or that investor in particular.

If you have multiple options, that’s OK for a big company with a sophisticated treasury team to evaluate. But it’s not fair to challenge a mid-cap with that. We need to be big enough to be able to say: “This should fit most investors in Europe bar one or two covenant changes or some exercises around that, that should work”.

That’s what the Eurobond market does. There’s not a huge amount of difference between types of Eurobonds but it’s [the uniformity] that gets investors buying and trading them. That’s where the Pan European PP market should be in terms of a modus operandi. We can get good deals done quickly and everyone knows what they’re about and it’s a uniform market. Everyone here knows what a Eurobond is broadly speaking. If we’re going to get to pan-European market of a material depth and size, I think we need something like that.

Richard Waddington, Commerzbank: You’re right: it’s important to service the next layer of issuers that isn’t currently well provided for. You’ve got the documentational aspect which is being pushed, but the biggest challenge in terms of developing the market is going down the credit curve and getting more investors to participate.

There are a lot of institutional investors that still struggle with unrated credit. France is a really good example of how that has developed. In Germany, the institutional market is not as well developed and that’s partly a result of regulatory issues. Pushing investors to go down the credit curve and getting comfortable with unrated credits is our biggest challenge.

You’re right: it’s important to service the next layer of issuers that isn’t broadly serviced here. You’ve got the docs side which is being pushed, but where the biggest challenge is in terms of developing the market is to go down the curve and get more investors looking at it.

There are a lot of institutions that, for example, still struggle with unrated credit. France is a really good example of how that’s developed. In Germany, too, the institutional market is not as developed as it should be and that’s partly a regulatory issue. Pushing investors to go down and get comfortable with unrated credits and going down the curve is our biggest challenge.

Nicholas Pfaff, ICMA: I’m getting a little bit concerned about the use of SME terminology. We need to focus on medium-sized companies. There is a threshold we don’t want to go below. In our discussions in the working group, there’s a clear consensus that at some point you reach a company size which is really best serviced by banks.

The banks have the numbers, they have the history, they’ve got the branches. What we’re really talking about is medium-sized or intermediate-sized, what in the UK is referred to as mid and mid-cap plus. I think it’s important to frame that because the SME term, a bit like the private placement term, is very elastic.

Alain Gallois, Natixis: I agree. We have to be very careful about the size of company we promote to investors. It could be a dangerous game and could destroy the market. On the issue of fragmentation, I’m not sure the markets are fragmented; they’re just at several stages of development.

US PP is a global market, you’re right. But who cares? The important thing is to have tools available for issuers that fit with what investors want to have in their portfolio. Harmonisation is always key in facilitating what we want to do: finance small and mid-cap companies in the real economy and put them in front of investors who absolutely need to diversify and to find new credits to invest in.

To be clear: the first step of the Euro PP market was around diversification into the mid-cap segment. The first effort of the Euro PP market was: “I want to have my full allocation. Deals are seven, eight 10 times oversubscribed. I’m fed up with this kind of transaction, I want my full allocation”.

Then we saw these big investors equipping themselves with analysts who were able to understand and analyse smaller credits and they moved into a lower range in terms of the size of the company. I’m not talking here about quality because there are small or mid caps which have great quality.

But this is how we built the Euro PP market which is more of a French market today but it’s a real mid-cap market that is opening to new kinds of issuers.

Brian Bates, Morrison & Foerster: Why are the French calling it a European private placement market when it’s French? We don’t call it the Missouri private placement market.

Alain Gallois, Natixis: It’s marketing.

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