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Monday, 11 December 2017

Nice initiative but no panacea

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The European private placement market is welcome but won’t be enough.

LIKE MANY PEOPLE, I’ve very closely  been following the debate around the long-heralded shift of European corporate funding away from banks and towards capital markets and other sources. Those of you who have followed my comments will know I’m pretty sceptical about it happening any time soon or in anything like the amount that happens in the US, although there will be some developments around the edges that will push in that direction.

While everyone’s picking up this broad debate and running with it, I reckon it’s currently long on aspiration and ambition and short on realism. One of the strands of the debate that is moving along, however, is the development of European private placements, which will definitely offer an additional source of capital for a limited number of borrowers.

Credit where it’s due: I think it’s great that the International Capital Market Association – as per its mandate – is picking up the baton and forging ahead with plans to establish best market-practice guidelines and principles as well as working towards standardised documentation and covenants for a pan-European PP market.

PRIVATE PLACEMENTS ARE in some ways a half-way house between the private and public markets. One of the issues on the table is where private placements rank. As they resemble loans more than bonds in many aspects, it looks likely the buyside and the working parties will push for them to rank pari passu with bank loans. I have not seen this raised as an impediment to the market’s development, but let’s see.

ICMA will be co-ordinating the work already done by the Pan-European Private Placement Working Group, an umbrella initiative of the Association for Financial Markets in Europe, Association of British Insurers, European Private Placement Association, France’s Euro Private Placement Working Group and the Loan Market Association.

The industry’s trade groups don’t have perfectly aligned motives or raisons d’etre and often seem to working almost in competition with each other so it’s good to see this show of unity. It’s also good that institutional investors and law firms are represented on the working group as well as the Banque de France and the UK Treasury.

The French have been working for two years on their private placement market initiative and since 2012 it has resulted in dozens of issues for French companies sold to local institutional investors. The “Charter for Euro Private Placements”, which came out a couple of months ago under commission from the Banque de France and the Paris Ile-de-France Chamber of Commerce and Industry and which is supported by nine professional organisations, is a good document that will serve as a useful guide for stakeholders in this emerging market.

The German Schuldschein market, which is of course long established, saw a significant uptick in international issuance in the years following the financial crisis. But as the international bond market roared back to life, non-German issuers have found less need to tap SSD for funds and the market has reverted somewhat to its more domestic roots.

I reckon Euro PP will, in a relatively short time, equal and then outstrip US PP

IF THE POINT of the ICMA initiative is to take existing European markets and try to create the underpinnings of a pan-European PP market, I think they may be on to something, You know what? I reckon Euro PP will, in a relatively short time, equal and then outstrip US PP, particularly given that around a third of US issuance is from European issuers and the market is patronised by a growing number of European institutional investors.

Despite the razzmatazz around USPP, it’s only expected to see US$45bn in issuance this year, which is pretty much what it has done in the past few years (although last year’s tally was around U$58bn). In the grand scheme of things, it’s actually not that big.

While I’m fully behind the Euro PP initiative, here’s my issue: I doubt it’ll solve the mid-cap corporate world’s coming debt refinancing mountain over the next three or so years, assuming banks continue moving in the other direction. Read any document around the topic and you’ll see my point.

The June 12 ICMA statement announcing its best-practice initiative makes reference to 200,000 mid-sized companies in the EU “looking to diversify their sources of funding at a time when the banks continue to retreat from the long-term lending markets”.

S&P reckons there’s €2.7trn in mid-cap debt to be refinanced out to 2018. And that of course doesn’t take into account the new money that corporates will need to fund expansion, which will be particularly key to sustaining economic growth.

The PP market won’t even begin to scratch the surface of numbers of that magnitude. Aggregate year-to-date European corporate issuance in the public bond market – including repeat multinational issuers – and in the French, German and US PP markets is running at around €180bn and the market has catered to the needs of probably no more than 250–300 companies.

And that’s my issue with the debate: it’s not focusing on the massive scale differential between those potentially seeking funds and the ability of any alternative capital market to fill the gap if banks remain closed to new lending, whether that market is Euro PP, institutional direct lending (which is hard to track in terms of dollars actually lent), securitisation, asset-based finance, institutional crowd-funding or the public bond market.

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