Private placements: Diversification drives US private placements
Record issuance while EMTN volumes slip; exotic derivative trades hit by appetite and regulation.
Investors and issuers are flocking to the US private placement market. A record $54.2 billion of deals was issued last year, and issuance so far in 2013 is matching 2012’s record pace. Brookfield Utilities, a UK energy distribution operator, recently placed a $900 million dollar and sterling private placement, the largest to date in 2013. The story for EMTNs is starkly different. Global private EMTN volumes fell 9% to $360 billion last year from 2011 – the lowest annual volume since 2002 – with structured EMTN sales plunging 38% to $33.8 billion, according to Dealogic.
By mid-March, global private EMTN volumes were down about 10% year on year, with structured EMTN sales falling by as much as 25%.
Although small compared with the EMTN market, the USPP market is expected to grow, accelerated by the disintermediation of bank finance. Similarly the European private placement market, which is still in its infancy, will be supported by this – as will the private German Schuldschein market for small to mid-sized companies.
“The level of investor demand and issuer supply is stronger then we have seen in a long time in the US private placement market,” says Angus Whelchel, head of private capital markets for Europe, the Middle East and Africa at Barclays in London. “The investor base is starting to expand beyond the regular buyers, while the issuer universe continues to grow as more and more companies seek to diversify their sources of funding away from more traditional methods.”
Historically, private placements have been sold directly by mid-cap companies to insurers and pension funds, but increasingly large-cap companies such as Mars, Pirelli and German software firm SAP are accessing this market and in size.
Mars privately placed $2 billion of bonds last year – the largest placement on record, according to research by Bank of America Merrill Lynch. SAP placed $1.4 billion and Pirelli $150 million.
In contrast, issuance of private structured EMTNs has fallen and might not recover in the near future. “There is healthy institutional and high-net-worth investor demand out there to lengthen duration and explore the credit curve to get better yield pick-up,” says Kentaro Kiso, head of global MTN and public-sector coverage at Barclays.
“However we are not seeing the same demand for esoteric, highly structured trades. Investors’ appetite today is so much simpler than it has been in the past, while on the other side, new banking regulations, particularly a combination of RDR/Esma and CRD4/Basle III, makes it prohibitively expensive for banks to arrange structured trades with long-dated derivative exposures attached.
"This is obviously impacting the supply of structured EMTNs because banks and SSAs were among the largest issuers.”
Amaury Gossé, director of MTNs at Citi in London, agrees: “Generally I do not believe we will see exotic structures or exotic payoffs, as we had before the crisis, coming back in the near future. Those days are gone.” Structured EMTNs only comprise 10% to 15% of the entire EMTN market, but such trades were often lucrative business for investment banks.
“What we have seen in the structured world is more and more index-linked trades being done.” Gossé continues: “so instead of having a structured coupon, you would have a normal structured note that pays a fixed-rate coupon and at maturity pays the best performance of an index. So now the innovation is not really in the payoff but in the underlying, and that’s a growing trend.”