Raising the USPP flag overseas
Those who work in the US private placement market, as it is often referred to, say this is a misnomer. They prefer ‘traditional’ or ‘global’ private placement market and, while the European challenge may be increasing, the numbers suggest they have a point. Richard Metcalf reports.
Of the roughly $65bn of debt issued in the US private placement market in 2016, bankers estimate that between 45% and 50% originated from non-US borrowers.
“It really is a global debt capital market that is in 4(a)(2) traditional private placement format,” says Richard Thompson, head of debt private placements at Mizuho in New York.
“We have a sophisticated issuer base in Europe looking for flexible and well priced debt and the private placement market is providing that,” says Siobhan Duffy, managing director for private placements at NatWest Markets in London.
Underpinning that international scope is the availability of a diverse range of currencies. While it started out as a dollar product, deals in other currencies have been available for decades and make up a growing portion of the market, accounting for between 25% and 40% of last year’s volume, bankers estimate.
Sterling and euros make up most of the non-dollar volume, but Australian dollars are also a big chunk and deals have been done in Scandinavian currencies and yen.
However, while the issuer base is increasingly cosmopolitan, investors remain predominantly American.
Beyond the dollar
That’s thanks to the willingness of US insurers to offer synthetic currency by arranging a swap at their end of a deal so the issuer sees a bid in the currency it wants. This approach, long practiced by top tier investors, is now also common even among mid-sized and smaller US insurers.
“It used to be that only the large institutions like Pricoa or MetLife — the really large US insurance companies — were active in the non-dollar market, and that was really because they had a presence in the UK for instance, and had sterling-denominated businesses,” says Brian Bates, a London-based partner at law firm Morrison & Foerster, who focuses on private debt. “Now you see practically all the US investors are willing to go out to the market, swap their dollars for non-dollar currency and participate.”
Meanwhile, US insurers are opening offices in London and elsewhere. In February, Pricoa Capital Group, the Chicago-based international private capital arm of Prudential’s global investment management business opened an office in Sydney, Australia.
US insurers are also managing funds on behalf of foreign asset managers that do not have the expertise to underwrite private placements. Bids may come in from such investors that are split between synthetic currency from the US insurer’s own funds and a ‘natural’ bid from the non-dollar denominated funds it is managing for a third party.
“That’s becoming much more prevalent,” says one US banker.
With so much capital to deploy, private placement investors prospecting for borrowers in Europe and beyond are increasingly stepping into higher beta industries.
Historically, mid-cap industrial firms were the main issuers of US private placements, but a wider variety of issuers have tapped the market recently, with higher education, social housing, real estate and financial services among the hottest sectors.
For example, UK real estate firm LondonMetric Property raised £130m in a three tranche deal in September, its first debt capital markets deal.
“Because it’s a confidential, discreet and non-disclosed market, issuers feel comfortable having an early discussion with investors before the format is sewn up,” says Peter Pulkkinnen, New York-based head of US private placements at BNP Paribas. “They feel as though they can have a consultative dialogue.”
Issuance from Europe has slowed in recent years, with the UK bringing most of the supply, but this is not all due to growing French and German private debt markets. EY research consistently ranks competitive bank lending above rival private placement formats as the biggest challenge for the traditional private debt market.
Additional causes for low volumes range from the macroeconomic environment and low capital expenditure and M&A activity in Europe, to Brexit. There is hope that issuance will pick up in line with eurozone growth.
“We’ve seen fewer deals from Germany and Switzerland,” says Morrison & Foerster’s Bates. “But as things get back into shape we’re hoping to see a lot more of that.”
Some placement agents concede that quantitative easing has increased the competitiveness of the European market, perhaps leading some issuers to go there rather than to US investors. Others acknowledge that the Euro PP and Schuldschein markets have been disruptive.
“What it’s done is it’s shut out the middle market unrated French corporates from accessing the market, because they have this domestic market they can go to with the local insurance companies and asset managers,” says one US private placement banker who asked not to be identified, referring to the Euro PP product.
What’s more, Schuldschein loans have been printed in dollars with competitive pricing and few covenants, says Pulkkinen at BNPP. “The Schuldschein market is something that the US private placement market has in its peripheral vision,” he says.
Some prefer to see the Euro PP and Schuldschein as complementary, rather than competitive. The Schuldschein may sometimes be advantageous in terms of pricing or covenants, but it is limited to tenors of about seven years, whereas US private placements can stretch to 40.