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Private placement bond market booms

The regulation-D private placement market in the US is a well-established bond market that has served predominantly unrated borrowers, both domestic and international, for almost 30 years.

After annual issuance peaked in 2003 at about $45 billion, the market went into decline, reaching a low point in 2009 when $25 billion was issued. But in 2010 the market is resurgent, with issuance expected to reach the heights of 2003, according to Bank of America Merrill Lynch, the top arranger of reg-D bond issues for the past 12 years. Issuance has more than doubled this year on the same period a year ago, with 42% of all the dollars raised coming from non-US companies. Steve Monahan, who heads BAML’s debt private placements division in Charlotte, North Carolina, says the bumper activity is a combination of increasing numbers of unrated companies seeking the security of longer-dated bonds instead of bank loans and an increasing need from traditional private placement investors for higher-yielding securities in what is becoming a prolonged period of low interest rates in the US.

With average deal sizes of $180 million for domestic borrowers and $270 million for overseas issuers, the market consistently prices in line with the public markets, although investors aren’t required to publish a bond prospectus. And deal sizes are getting bigger. In the first half, the NFL issued $835 million of bonds, while Heineken became the biggest overseas issuer, with a $725 million deal. That might convince some companies that credit ratings aren’t always essential to access the capital markets, says Monahan.

Seventy percent of all issuers this year have been unrated, with the main cross-border jurisdictions being Canada, the UK and Australia. Another key feature of the private market has been its willingness to cooperate in accepting deferred funding. If conditions are favourable for a borrower to do a deal, but it doesn’t have an imminent bond or loan maturity, the private market will price the transaction today but defer the funding out several months for little or no cost. A lot of public market issuers that might do a pre-emptive refinancing typically have to contend with a negative carry, so they are now looking at the private market as a more flexible option, says Monahan. Sometimes less is more.

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