CONGRATULATIONS TO THE International Capital Market Association’s Pan-European Private Placement Working Group for getting its market guide out this week. As much as anything else, it’s a triumph of consensus-building around a fractious group of organisations and interests all trying to protect their patches while simultaneously espousing the cause of PP Euro-regionalism. (They kind of have to be seen to be doing so as PPs are a plank of the Capital Markets Union, which probably accounts for why they’re so “in” at the moment.)
The sheer number of corporate treasury, bank and investor trade groups and bodies, financial-centre and other lobbyists and politicians seemingly mad for PPs is mind-boggling. I bet the PEPP-WG meetings were painful, so coming up with a voluntary framework for common market standards and best practices needs to be commended all the more.
The private placement debate in Europe is a bit of an odd one and today’s fragmented market broadly breaks down along country lines. How it morphs from that into a region-wide financing channel open to Europe’s SME hordes is a tough challenge. Standard docs and practices will certainly help but that’s not what’s necessarily holding the market back.
European PP politics are fascinating and I don’t claim to fully understand them. For a start, you’d have thought the various parties would have ceded ground to give the ICMA guide maximum fanfare. But no. The Loan Market Association launched template documents for use in European PPs ahead of ICMA on January 6 in response, it said, to demand from members. The LMA templates cover loan and note formats and are governed by English law.
The Euro PP Steering Committee also front-ran ICMA, releasing two model agreements two days after the LMA and under the auspices of the Banque de France and the French Treasury. The French standards also cover placements in loan and bond form but are drafted under French law. Of course, both claim they’re complementary with the ICMA initiative and will promote a coherent approach. I’m not so sure.
COUNTRY POLITICS ACTIVELY play into this story. To cut to the chase: the Germans are not about to allow the French or anyone else to usurp the pre-eminence (as they see it) of their beloved Schuldschein market – which raised €12bn for 90+ mainly German corporates in 2014 – in favour of new-fangled Euro-PP that they see as a fabriqué en France creation involving rival French banks, French issuers and French investors (which in fact it largely is).
Not that there’s anything remotely wrong with that. The French in turn are proud of their Euro-PP initiative that raised about €3bn last year for around 40 companies. And they waste no opportunity to laud its achievements, particularly as their 2014 Charter for Euro Private Placements acted as a base source for the PEPP-WG work.
Meanwhile, the British are pushing ahead with plans to develop the UK Private Placement Market, writing a provision into the Finance Bill 2015 allowing for withholding tax exemptions on corporate private placements – which must be unlisted and have a minimum three-year maturity to qualify.
German insurance companies are going it alone with the (rather unformed) German Private Placement Market; while the Italians have high hopes for their minibond market (OK not technically a PP market but certainly an SME funding solution), suggesting it could soar from its €1bn-plus financing volume today to reach €20bn–€30bn involving up to 4,000 companies.
While PPs will no doubt play a role in financing corporates in Europe, they won’t make much of a dent in overall needs
NOT TO POUR cold water on any of the initiatives, but while PPs will no doubt play a role in financing corporates in Europe, they won’t make much of a dent in overall needs. In this respect, I take issue with the inferences made from the stats presented in ICMA’s press release. It notes that French and German domestic PP markets issued about €15bn of debt in 2013 in addition to US$15.3bn raised in the USPP market by European companies. OK fine.
But it then goes on to quote S&P research indicating that there is €2.7trn of debt that will need to be refinanced by mid-sized companies between now and 2018 at a time when banks continue to retreat from long-term lending markets.
Hang on a minute: even if you add the French/German totals to the UK private placement market’s aspirational target annual issuance volume of £15bn (US$23bn) and that rather “out-there” minibond number, you don’t even reach US$100bn or … err … less than 3% of refinancing demand. Such is the incongruence that I consider the relational comparison a non-sequitur, while of course not dismissing US$100bn as trivial because it’s actually pretty impressive.
Ditto the number of companies for which PPs will be a solution. In short, it won’t get anywhere near the approximately 200,000 mid-sized companies ICMA says are looking to diversify their sources of funding away from the bank loan market, and which will view private placements both as an alternative and as an intermediate step towards the listed bond markets.
This pre-supposes that bank lending will be in perennial decline. The numbers don’t necessarily tell that story. They certainly don’t reflect the reality in Germany, where banks are liquid and actively lending. And of course as I’ve mentioned several times before in my mad scribblings, the majority of those 200,000 companies supposedly seeking alternative channels are micro-companies and will not be able to access non-bank finance. It’s worth noting that the average Schuldschein issue size in 2014 was €120m; and €60m for Euro-PP.
Long story short, private placements will take their place as an alternative for mid-cap companies alongside direct non-bank lending from insurance companies and pension funds; lending by credit funds seeking more mezzanine-type returns; crowd-funding solutions and others. But let’s not get ahead of ourselves here and set it unrealistic targets.
(This is an updated version of Keith Mullin’s column which appeared onlin on February 12)
