Monday, 22 October 2018

IFR Private Placements Roundtable 2015: Part 3

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IFR: Alain, the Euro PP Steering Committee is driven by marketing on one level which has already been mentioned. Was there an element of competition with the Pan European group?

Alain Gallois, Natixis: In one sense, yes, but at the end of the day, not really. Even if there is slight competition between countries, the ultimate goal is to try to find the best framework for this market to build on. All the efforts which have been made are definitely going in the right direction in order to build the foundations of this common market.

IFR: Beyond Schuldschein, Germans talk a lot about the German private placement market. I’m not even sure I know what that is. It seems to be a very unformed insurance-driven initiative. Can you elucidate? Does that market exist really, GPP?

Richard Waddington, Commerzbank: Not really. There clearly are private placements but they’re usually in Schuldschein format. You have two forms of Schuldschein. You have broadly syndicated Schuldschein, and then you have what I’d classify as bespoke Schuldschein.

Bespoke Schuldschein would be more akin to an EMTN for a rated issuer where you’re working with maybe two or three different investors and it’s a longer-dated deal that’s put together and done quietly with a different type of investor base to that of a Schuldschein for an unrated issuer that’s more broadly syndicated in the market.

IFR: Ash, can I ask you the same question? In the UK Finance Bill, there’s a specific mention of UK private placements with withholding tax exemptions subject to conditionalities. What is the UK private placement market? Is it just something that someone’s just invented and told the government that it’s a great thing?

Ash Shah, Barclays: It’s an element of that. I’ve been trafficking in this space for a while and I’m still not clear what a UK private placement is. If I were to guess, I would say it was a private placement for a UK issuer sold to a UK investor and maybe some others.

I don’t see what’s UK about anything or French about anything. It’s a private placement. I think that whole thing is a bit of a red herring. UK PP may allow some foreign money, some offshore money to buy private placements more easily, but I don’t think that necessarily changes the ultimate underlying trade that was going on before.

Calum Macphail, M&G: There was an announcement that followed the autumn statement from six insurance companies where they did say that they were looking to commit capital to the private placement market over the next few years.

I’m not saying you can necessarily tie both those things together but clearly there is a desire to see a market evolve to the point where we have a UK private placement market. [We’re starting to go back to where we started].

If a UK institution lends money to a UK company under a US NPA agreement, what is that? Is it a US private placement, is it a global private placement, is it a UK PP? Names are important because they help people understand what they’re doing, but I don’t think it necessarily drives investment.

Nicholas Pfaff, ICMA: The British Association of Corporate Treasurers is also involved in what we’re doing and one of their concerns is that there is a segment of medium-sized and larger companies which could benefit from this market and couldn’t necessarily access the US PP.

Whether it’s through the guide or the LMA documentation for example, we made sure that what we were doing would facilitate the opening of the market to that segment.

IFR: One of the other aspects out there in terms of credit extension in Europe is the emergence of non-bank credit funds. There have been quite a lot of them. Some are more on the hedge fund side; others are direct non-bank, non-insurance credit lenders. Stuart, have these people come into your radar screen? Do they provide you with any competition? Or do you see them chasing a different segment altogether?

Stuart Hitchcock, NYL Investors: I’ve not seen them; they’re not really notable to us in any way. In the segment that we have, the competition is the same as it’s always tended to be.

Ash Shah, Barclays: It’s a fair point, Keith. Where that capital has been raised from hedge funds or similar, it’s going again into funds that can generate 7%–8% returns as opposed to the investment-grade returns. To Nick’s point and the point we’ve been making, it’s growing the market, it’s trying to develop that new stratum of company because it is about getting capital to small and medium-sized companies.

That’s where these funds are trying to find some opportunity. As bankers, we’re not going to be able to go to a credible issuer and say: “with all honesty, you should take this money from a hedge fund”. It’s not going to serve us as agents; it’s not going to be the right thing for that particular issuer.

On the basis there isn’t much of an alternative for that type of company potentially, maybe their alternative is only to go to that. As a market, we don’t serve that type of corporate but maybe that’s all they’ve got. Frankly that may not be the best place to be but if we can develop the insurance and pension fund investors, i.e. the typical buy-and-hold market, to that stratum of company we will be serving a lot of people’s interests.

IFR: To close our session, I’d like to go around the table and ask each of you to expound your expectations for the rest of the year in whatever market segment you want and whatever focus you have.

Stuart Hitchcock, NYL Investors: We’ve seen a huge amount of transactions for UK issuers in particular since the beginning of the year, a number of those for much smaller-sized issuers that has historically been the case. The pipeline for the UK looks extremely strong but it looks like playing out over a longer period of time than necessarily all coming in at one stage.

My expectation would be that our volumes and the market’s generally should be somewhere in line with last year. However, we have begun to see a few green shoots of opportunities being spoken about across Europe, which is quite positive. That’s outside some of the local market transactions that have been taking place across Europe.

There’s a huge amount of money to put to work. In terms of dynamics, I think the one that will remain will be the huge supply-demand imbalance, and therefore issuers being able to generate a huge amount of capital at historically low rates.

Emilie Wong, ING: From a Euro PP perspective, what we have been seeing since the beginning of the year is companies from new sectors tapping the market and more geographical diversification. Euro PP started as a French market but we’ve have seen some Belgian issuers coming to the market since the beginning of the year. Dutch issuers are also gearing up and opening up to EUPP as a funding alternative.

For them, it was a learning curve and having standardised documentation has helped get them on board. Guidance from some local governments has been very clear from the support it provides to the real economy.

I think we will see more cross-border transactions, so not just one pool of investors from one country but a variety of investors and diversification in terms of sector, assets, countries and what they want to invest in. We are definitively moving towards a more pan-European market.

Volumes are definitely going to the upside, and I see more harmonisation, we tend to see more common ground in what is acceptable in terms of listings, in terms of covenants and in general in what investors are looking for in Euro PP. That should facilitate cross-border activity.

Jason Rothenberg, MetLife Private Capital Investors: There is a supply-demand imbalance in our market currently; there’s not enough issuance to go around given demand from the investor side. When you look at issuance from Europe in the US PP space over the last few years, despite slow growth generally, we’ve seen record levels of issuance and that stems from the post-financial crisis period and companies looking to diversify their sources of funding. I think things are normalising a bit this year.

A lot of companies are fairly well funded. Some may have been concerned about rates rising so they may have pre-funded. But as economic activity starts to pick up – the IMF just raised its growth forecast for Europe again – hopefully we’ll see more investment by companies, more M&A activity, which will continue to create opportunities in our space, so I’m optimistic that by year end it will be on par with recent years.

Calum Macphail, M&G: It’s always difficult to call the market because as a private market its visibility is by its very nature limited. I suspect it’s going to remain a supply-constrained market rather than a demand-constrained market. I think we will begin to see more investors come into the market. I think Ash mentioned earlier that there are a lot of investors in Europe who are looking at private markets. They may not have quite figured out yet how to enter them, but I would expect over the course of the year we’ll start to see some of them dip their toe. I think that will lead, as Emilie says, to more genuine cross-border transactions within the European space.

Nicholas Pfaff, ICMA: We’re going to be very vigilant in supporting the cross-border development of the market. We issued the guide and we’re going to try to roll out the effort that we’ve started this year.

What happens in the UK market is going to be very important in terms of that market acquiring greater depth. What’s happening in Italy is very important, and that’s a big focus for this year, even if the results only start showing next year. It’ll be also very interesting to see if we can bring this pan-European effort into a greater dialogue with what’s happening in Germany.

I think there is more convergence now between some of the practice in the international Schuldschein market and some of the practices that we’re talking about. That’s something very interesting that we need to focus on in the interest of a greater pan European market.

Ash Shah, Barclays: From a traditional private placement market, we’re still calling for a volume of US$50bn–$60bn equivalent for this year. We still think that this year will be broadly as similar as last year, albeit we’re slightly off at the moment. We think rates are going to stay low this year, so we think that’s going to generate the supply, albeit less supply than we would wish, and we look forward to getting this LMA document and other documents out to the issuer group.

What we’ve noticed is that while there’s been a lot of discussion in forums, we haven’t seen a huge amount of push to issuers or to investors, so we look forward to getting the message out to investors particularly and try and educate them on what this is about, and then to some of our issuer clients, and then try to be able to compare and contrast what the options are.

We hope by the end of the year we’ll see a few more corporate transactions so we can all have data points to compare against, because at the moment it seems like the data points are the key thing that’s missing.

Brian Bates, Morrison & Foerster: We’ve seen a lot more in terms of structured-type transactions, project-type deals coming to the market. We’ve seen a number of new types of issuers; I’m thinking in particular of investment trust companies that are accessing the market. We’ve come off a record year ourselves, and given Stuart and Jason’s informal suggestion that they would make sure their direct issuers would get better advice, we’d look for another big year on the direct side. That’s our hope.

Richard Waddington, Commerzbank: Spread compression continues out there; relative to the rated market, there is a pick-up in the unrated market and that is one of the things that investors like about the unrated product. The Schuldschein market has always had some institutional investors, but there is increasing interest because they like the spread pick-up it currently offers relative to the rated market.

The institutional investor base for Schuldschein is growing, which is very welcome, and we would like to see it develop further. One of the things I would caution generally is credit quality. We are seeing some aggressive behaviour in terms of some of the credit quality that’s been brought to the market, and I think arrangers need to be careful in that regard.

It’s up to the arrangers to keep a handle on that. It’s a competitive environment and investors have got to make their own minds up. But we are seeing some companies bandied around which are starting to get a little borderline from my perspective in terms of credit quality.

From a volume perspective, we had a bigger year last year than in 2013 and that was partly driven by some of the floating-rate Schuldschein being refinanced, which is attractive for the issuers, not so attractive for the investors and I think we’ll see some more of that on the floating-rate side in 2015 as well. But this year should be a positive year overall from a volume perspective. The ZF transaction will distort the volume number but, that said, I think we will be up on 2014; particularly on the international side.

One thing that will be very interesting to watch this year will be the dynamic in the French market between the Schuldschein and Euro PP as they skirmish over market share of private placement issuance in France.

Alain Gallois, Natixis: I really think we have succeeded with the creation of the Euro PP market, which did not exist three years ago. Now it’s a real market which has achieved some goals. Access to the market for mid-caps, with issue sizes of €50m–€7-m, now accounts for something like 70% of the market and crossover companies account for something like 40%, 45% of the market.

This new market has the capacity to provide diversification for banks on one side and investors on the other side. We are succeeding in terms of harmonisation, and that will speed up the process and allow new issuers and new investors to access this market.

The big challenge of 2015 will be the internationalisation of the Euro PP market, which is still too French in terms of the investor base and the issuer base. But as Emilie said, that’s starting and I do think the standardisation of documentation will definitely help this market to become really international, whatever it’s called.

IFR: Would you expect to see German issuers who maybe can’t get Schuldschein access coming to the Euro PP market?

Alain Gallois, Natixis: Absolutely. Especially on the crossover, on the Double B side, but sure, we will have German issuers coming to the Euro PP market as we have French issuers tapping the Schuldschein market, as we have French issuers tapping the US PP market. It’s just a question of opportunity.

IFR: Ladies and Gentlemen: thank you so much for a very good discussion.

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