Up close and impersonal
France has made significant progress in attracting private placements, with more than €12bn issued since 2012, but efforts to foster a pan-European market that could rival the US are taking time to get off the ground.
For corporate issuers struggling to access traditional sources of financing in recent years, the private placement market has been a lifeline of sorts, allowing them to gain direct access to institutional investors.
In France, the development of standard documentation is giving market participants greater confidence, but recent industry efforts to develop a pan-European private placement (PEPP) market are proving more difficult.
“The challenge we have found with the PEPP product is persuading investors to buy unlisted, unrated and illiquid securities. The legal template documentation is now in place and ready to use, and many banks and lawyers are familiar with it, but there is still work to be done to educate some investors in the UK and Europe in order to get them comfortable with private placements in general,” said Angus Whelchel, co-head of private capital markets at Barclays.
In a typical private placement, a company would issue a long-dated security directly to a small group of private investors without having to adhere to the more rigorous requirements of the bond market. Since the financial crisis, as bank lending has come under pressure, private placements have been gaining favour, particularly in the US where the market is most developed.
In 2014, private placement issuance in the US totalled US$50bn (€44bn), while Germany’s long-established Schuldschein market attracted €12bn, and €3.3bn was issued in France’s growing Euro PP market, according to figures compiled by BNP Paribas, Thomson Reuters and the Private Placement Monitor.
“Since the financial crisis, issuers have been looking to diversify their sources of financing, and a growing number of SMEs and investors are now focusing on the private placement market, where investors can source better financing and issuers can secure longer maturities than in traditional bond and loan markets,” said Fabien Calixte, a private placement specialist in French corporate debt capital markets at BNP Paribas.
Appetite for long-dated maturities is particularly evident in the US market, where 85% of investors surveyed by Ernst & Young in its 2015 market survey had a strong appetite for investments with a 10-year maturity, while 54% had an appetite for transactions with a maturity of 20 years or longer. The longer maturities available through private placements have advantages for issuers as well as investors.
“The financial crisis and the sovereign crisis put pressure on banks’ capacity for lending, so the strategy of SMEs changed as they realised they could no longer rely on banks for financing. Private placements often have longer maturities and allow companies to plan better for their future needs,” said Guy Silvestre, co-head of global capital markets at Societe Generale.
While European investors may still need convincing of the benefits of private placements, the supply of issuers in the US market is struggling to meet the demand from investors, with 82% of investors having wanted to invest more last year than they actually did, according to the E&Y survey. Dealers believe there is also no shortage of potential investors in Europe, but they just need educating about the market.
“The typical investors in private placements are insurance companies, because they have a steady and consistent stream of cashflows coming in from insurance premiums that needs to be invested. That plays well for private placements because the market typically remains fairly stable during times of market volatility, given investor demand to put the money to work,” said Whelchel of Barclays.
The infrastructure to support private issuance in Europe is developing rapidly, and the past three years have seen a string of countries looking to the market as a way of creating new financing opportunities for companies. Although the US market is open to foreign issuers, it is a challenging route for some companies, particularly those without the resources needed to issue to foreign investors.
“While it is certainly feasible, and indeed quite frequent, for European issuers to use the large and efficient US private placement market, an issuer should always be keen to borrow under its governing law and to find alternative sources of funding. So there has been a widespread push from all market players to support a European private placement market as a complementary offering to the US market,” said Hubert du Vignaux, partner at Gide Loyrette Nouel, a Paris-based law firm.
Germany’s Schuldschein market remains by far the most popular avenue for private placements outside the US, but France has made significant strides forward in developing the necessary documentation to standardise the issuance process, and volume in France has been growing steadily.
Total issuance in French private placements since 2012 is estimated at around €12bn, with more than €3bn issued each year, according to Euro PP, the umbrella group leading the development of the market in Paris. While the total value of issuance has only grown marginally each year, the number of transactions is clearly on an upward curve, with 55 deals recorded in 2014; up from 39 in 2013, and 21 in 2012.
The development of domestic private placements dates back to 2012, when Societe Generale partnered with AXA to offer French companies access to alternative financing. The first private placement resulting from that partnership took place in July 2012 for Sonepar, a family-owned French company specialising in the distribution of electrical products. After that initial issue, the deals followed thick and fast, and by year-end, SG had arranged nine transactions, raising nearly €1.3bn and giving the bank a market share of roughly 40%.
“The French market developed as banks and insurance companies began co-operating on private placements. Having started on a small scale, it has been very successful and has garnered support from a variety of participants as an alternative funding source for companies,” said Whelchel.
The Euro PP initiative has been highly instrumental in the development of the French market, with a charter published in June 2014 that sets out standard templates and processes for arranging private placements.
Earlier this year, the steering committee issued two model agreements to complete the charter and provide industry standard documentation, marking a further step in building a sophisticated French market. On March 13, Euro PP held its first industry conference in Paris, bringing together more than 300 issuers, dealers and investors to discuss the nascent business.
But there are concerns that the French market is still based predominantly on listed securities, suggesting that investors are not yet fully comfortable with the private placement format. According to Euro PP, just 42% of issuance last year was unlisted, representing €1.4bn, although that had risen from just €472m (14%) in 2013 and €325m (10%) in 2012.
Some also believe that while Euro PP has been developed in Paris to meet the financing needs of French companies, it will only achieve significant further growth if it can attract participants from outside France.
“Beyond the Schuldschein market, the evolution of private placements in France has probably been most significant in Europe. But if the volume is to grow further then we will need to attract placements from non-domestic issuers and investors, just as Germany and the US have done when growing their private placement volume,” said Calixte of BNP Paribas.
Du Vignaux believes that having shown its growth potential over the past three years, Euro PP should now be the standard around which other developing private placement markets in Europe focus their efforts.
“Euro PP has been produced on the basis of the very significant number of real transactions made on the French market since 2012. Although harmonising regional differences will be a challenge and will certainly require some compromise, the logic should be for the European market to coalesce around the standard that has already proved its efficiency and resilience,” said du Vignaux.
But while Euro PP is increasingly well regarded outside France as a successful domestic initiative, it is not yet considered to be the industry standard for Europe. Over the past year, the International Capital Market Association (ICMA) has been leading a group of trade bodies, institutional investors and law firms in a separate effort to develop its own pan-European best practice guide.
Building partly on the groundwork laid by the Euro PP charter, the PEPP working group launched its market guide on February 11, setting out a voluntary framework of industry standards and best practices. While the working group hopes the guide will expand funding opportunities for European corporates and answer industry demands for a less fragmented approach that might ultimately rival the US market, it will take time to achieve.
“The ICMA working group spent a lot of time in 2014 working on ways to combine the achievements around the Euro PP with the pan-European effort. There is still a lot of work to do to promote the PEPP market guide across Europe and attract issuers to this market,” said Silvestre of Societe Generale.