Private placements: USPPs ride to the rescue for Europe’s corporates
Market doubles so far this year; Investors more resilient to risk-off sentiment
The US private placement (USPP) market is fast emerging as a go-to source of long-term capital for large companies outside the US, after consecutive years of record issuance.
Indeed, of the nearly $50 billion of privately negotiated debt finance provided by US insurance companies last year, more than two-thirds was invested in non-US companies. This has been a lifeline for European companies, many of which have lost access to some of their traditional funding sources.
European corporates that have recently tapped USPP investors include French defence firm Safran, which has scooped the largest reported deal of the year so far, raising $1.2 billion across five-, seven-, 10- and 12-year maturities, paying 3.14%, 3.7%, 4.28% and 4.43% respectively.
Citi and Bank of America Merrill Lynch (BAML) arranged the placements, which followed a €950 million five-year syndicated loan raised at the end of October.
UK engineering group Weir issued $1 billion of seven-, 10- and 11-year debt via BAML and HSBC.
Water taps longer term
Elsewhere, Thames Water Utilities, rated triple B, highlighted the term capacity of the market, with $750 million across seven-, 10-, 12- and 15-year maturities. HSBC and Morgan Stanley arranged the deal.
Last year’s volume was the highest since the heady days of 2003, but the market has already doubled in size year on year in 2012, raising more than $9 billion since January.
Angus Whelchel, Barclays Capital
"Risk-off sentiment historically has less influence on the US private placement market than on public markets, given the buy-and-hold nature of the investor base," says Angus Whelchel, head of private capital markets at Barclays Capital in London. "Coming into 2012, the one clear message we have heard is that investors remain very much open to European opportunities, with a focus on companies with well-diversified international operations. The peripheral geographies can sometimes be more challenging, but we have seen a big up-tick in issuance from France, for example, as well as [inquiries] from the likes of Germany and Scandinavia."
Dealers say that life-company investors typically price debt somewhere between levels available in the US public corporate bond market and the Eurobond market, with the illiquidity premium they charge for the luxury of locking in current rates driven by an individual company’s credit fundamentals.
"Although investors typically look to the public markets to help determine relative value and as a starting point for determining illiquidity premium, the dollar private placement market has been more competitive than other debt markets for certain kinds of issuers," says Whelchel. "Triple Bs on average can print in the 4% to 5% range for 10 years, and implied single-A or better companies can expect to improve on that."
Moreover, with investors demanding larger allocations, private placements can now satisfy jumbo funding requirements. Around a quarter of the deals closed last year were at least $500 million in size, more than double the traditional tranche size of $200 million to £250 million.
"More companies are looking at the US private placements market as an alternative to the Eurobond market," says Marie Fioramonti, head of Pricoa Capital Group’s European operations. "It offers very attractive pricing, it does not require an external rating and the investors are not put off by complexity or a difficult story."
Pricoa has increased its allocation to the asset class seven times during the past 15 years, but its $15 billion commitment to the USPP market represents just less than 25% of its $62 billion assets under management.
Although USPP investors prefer investment-grade risk, borrowers can forgo the hassle of maintaining a public credit rating. Whelchel says: "The US private placement investor base has always been well resourced and very willing to do its own rigorous due diligence to determine which companies present the most stable long-term credit profiles to match liabilities in their portfolios, which means many borrowers don’t need to have a formal credit rating."
"At a recent industry conference, every buyer we spoke to had a positive outlook on the market, and investors were willing to look longer than the average 10-year modified duration," explains a London-based dealer. "Demand exists for 12-, 15-, 20- and 30-year exposure. More and more investors are willing to bid longer, and have needs in alternative currencies such as sterling and euro."
Notwithstanding the long-term yield opportunity for asset-constrained investors, the unregulated status of the market has sparked some concern over its rapid growth in size. But investors do not seem overly worried.
"Our default rates have been very low, and because we have transparency with the borrower to identify problems early, recoveries tend to be high," says Fioramonti. "The end result is a very, very low loss rate. Good security selection and good structures protect the integrity of our investments. We are investing our own money – the lack of regulation does not inspire us to take undue risk."