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Corporate BondsPrivate debt

Youthful Euro PP strives to prove it has come of age

Quantitative easing has made investors’ lives hard, even outside public markets. As spread compression makes its way into private debt markets, even the most experienced buyers are finding it hard to source investments that pay enough yield.

11.1

But while investors are frustrated, issuers have a luxury of choice. The booming Schuldschein market, with €26bn of issuance last year, exemplifies the competitive pricing and diversity of lenders that some private debt products can offer.

Meanwhile, the Euro PP market, which does not pull in banks like the Schuldschein, has struggled to generate impressive growth in volume since its inception in 2012, though it is usefully serving smaller companies. 

GlobalCapital met some of Europe’s largest private debt players in Paris in March to debate the state of these products and their future.

Participants in the roundtable were:

Fabien Calixte, PP specialist, EMEA corporate debt platform, BNP Paribas 

Edouard Lemardeley, managing director – senior banker, UniCredit

Antoine Maspétiol, head of private debt, Aviva Investors

Maxime Paran, director, debt capital markets, ING 

Klaus-Peter Schommer, head of syndicate, Helaba

Renaud Tourmente, co-head of loans and private debt, AXA Investment Managers

Thierry Vallière, global head of private debt, Amundi

Ross Lancaster, moderator, GlobalCapital

globcap
: In light of the banking sector’s recovery and huge central bank intervention in public bond markets, is there still a need for corporate private debt? 

Fabien Calixte, BNP Paribas: Private debt is here to stay. In 2016, there was a reduction in Euro PP volume with only about €5bn of deals. But then you also had €26bn of Schuldschein and more than €63bn of USPP. Those figures show that while the Eurobond market is very important and it’s true that the banks’ lending appetite has been very strong, there is clearly both corporate and investor interest in private markets.

Antoine Maspétiol, Aviva Investors: In the Euro PP market, there have been fewer large transactions but there is still a strong corporate appetite to diversify funding sources, and improve agility around maturity profiles and flexibility on documentation. The market is facing some challenges but it’s a new market. As Euro PP investors we need to be agile and able to provide corporates with the right solutions alongside the banks, given that they are providing more capital than they used to in the past. But we are very comfortable and confident in this market on a long-term basis.

Edouard Lemardeley, UniCredit: Beyond volumes, last year there was more granularity in the Euro PP market and that is a positive development: more small companies being able to print. I’m sure volumes will go up again. Remember QE is a provisory technical factor. For the European private debt market the other positive development is Schuldschein’s development into a more international market, in issuer base but also investor base. International investors accounted for at least 40% of the market’s buy-side last year. That shows these markets are developing pretty fast.

Klaus-Peter Schommer, Helaba: I agree. Formerly, Schuldschein was a product issued by German, Austrian and maybe Swiss borrowers. Those Swiss issuers were not very active, but two years ago they increased their activity by 90%. French borrowers have been especially active too, gaining 10% market share in 2016 and that is still growing. Since 2014/15, big French companies have returned to Schuldschein after being absent since 2008, when the corporate bond market was shut down. For example, Neopost, which has twice tapped the market. But there is also internationalisation on the investor side, which is as a positive. More issuers will bring more investors and vice versa.

globcap
: Why Schuldschein specifically? Is it the light documentation that’s attractive?

Schommer, Helaba: Sure, the documentation is an attraction but so is M&A activity. We used to only see refinancing of bridge loans with bonds. Now it’s done by Schuldschein and has been an amazing success. The first time we went beyond one yard on size for Schuldschein issuance was for refinancing bridge loans. That was the ‘lift-off’ moment, where everybody learnt that we could build that size transaction and have the investor base to support it.

Lemardeley, UniCredit: Schuldschein has the benefit of being extremely standardised. Also, 2016, was a volatile year in public markets and Schuldschein is not much correlated to world indices or public markets. It’s more stable and adjustments are slower than other bond markets. That’s also the reason why some big companies, blue chips, decided to go to the Schuldschein market, because they had more visibility on the outcome of their trades than on the public side. 

11.2

Calixte, BNP Paribas: There is also the very rational element of pricing. The driver behind the massive appetite for Schuldschein is coming from banks, which is driving pricing pretty aggressively compared to other private debt products. The other element is flexibility: in tranches, in maturity, in currency, in the fact that the German law allows an issuer to repay in advance for FRN tranches. For a blue chip, unrated company, that’s the multilayered attraction of Schuldschein.

Maxime Paran, ING: But the two markets have different investor bases.

Calixte, BNP Paribas: Yes, absolutely.

Paran, ING: For Euro PP, you’re more talking about real money investors, and Schuldschein, bank investors. My question for the investors around the table is are you investing in Schuldschein?

Schommer, Helaba: There are institutional investors and real money investors, pension funds in the Schuldschein market. That’s due to the flexibility of this product. You can issue three, five and seven year tranches and suddenly attract an insurance company and add a 15 or even 30 year tranche.

Paran, ING: That’s true. But the acceptance of lower pricing in the Schuldschein market has been driven more by bank investors than real money investors.

Maspétiol, Aviva Investors: Yes. We can do a Schuldschein but as long as it keeps being favoured by banks, it’s not attractive for us. We don’t want to compete with banks. So if there is an interesting and attractive transaction with the Schuldschein format, we will do it, and have worked on those deals in the past. But we want to have a decent risk-adjusted reward for our investors. We are not seeking commercial or side business. So if Schuldschein keeps being favoured by banks, we won’t be interested in it. It’s not a question of format.

Paran, ING: So it’s only a question of pricing? 

Maspétiol, Aviva Investors: It’s a question of pricing, and terms and conditions. So ultimately, at Aviva Investors, we do not follow this Schuldschein trend because it’s not currently attractive enough for our clients, in our view.

Renaud Tourmente, AXA IM: We also look at all different formats of private debt. In Euro PP, we have been very disappointed by the volumes generated in the French market. We had expected issuance of €10bn-€15bn a year but instead we had only €3bn-€4bn a year. The market started in 2012 and is still very young. The banks have come back into lending very strongly after the Lehman crisis and the disintermediation trend that started in 2012/2013 has plateaued. Hopefully that can be improved and we can move towards a US standard of disintermediation.

But we are far from there and the evolution of Euro PP is a bit concerning. The US PP market is very stable though, with €50bn of annual issuance over the last four years. A large portion of that is cross-border issuance, up to 40% of deals are done outside the US. There is an established, good standard for investors through NAIC ratings and make-whole calls. We like that and we can invest into that format. Now, if you look at the Schuldschein market, historically it’s been, what, €8bn-€12bn a year of issuance. But the last two years have been record years of issuance. We’ve bought Schuldschein when we saw adequate pricing. We’ve done it when the covenants and the documentation were good. But most of the time, we find the documentation is a bit light, it’s lacking covenants and the pricing is very stretched. And it’s true, it’s mostly a bank market. 

As an investor, it’s hard to see value in this market. I have nothing against the Schuldschein market but it isn’t protective enough or attractively priced enough for us. 

Lemardeley, UniCredit: I disagree. When you compare it to bonds, even for unrated mid-cap companies, Schuldschein documentations are slightly more protective, in wording for negative events but also covenants, which are usually normal features in the documentation.

Tourmente, AXA IM: My point is twofold. Firstly, because there is so much imbalance between supply and demand, the documents weaken, because you’ve got too many people willing to lend under the format and most of the time you don’t get the documentation you want as an investor. Secondly, as we’ve seen with French Schuldschein issuers, there is a problem if you happen to have a covenant or underperformance issue. The Schuldschein format is a bilateral agreement with many lenders. Good luck to the issuers to negotiate under this situation! It’s not easy. Even if you’ve got a bank which is co-ordinating the situation, it’s far from easy.

11.3

Schommer, Helaba: But normally Schuldschein is an investment grade product, not a non-investment grade product. So you can include covenants, in a bond format with make-whole clauses. But the main point is that Schuldschein is an investment grade product and normally, covenants do not fit into that product. We always stress that this is a very big difference with the so called Mittelstand bond market segment, where  we saw companies struggling to meet their obligations.

Tourmente, AXA IM: Just to be clear, I’m not going all guns blazing against Schuldschein. I have no hard feelings towards the product. I’m just saying that the market as it is now is not something we are pursuing actively because we find the pricing we are getting for the credit profiles that we see is not attractive.

Calixte, BNP Paribas: The reality is that we are in an environment where there’s too much liquidity in the bond market and other markets. You’re right, there’s an imbalance between supply and demand. 

Thierry Vallière, Amundi: I fully agree that there is an imbalance in the market. There is too much liquidity notably because of the effect of QE and banks coming back very strongly on lending. We are agnostic in terms of format and will look at both loan and bond in the Euro PP, Schuldschein and USPP markets.

But the reality is that the Schuldschein market is not a real disintermediated market. It is favoured by banks that can refinance themselves and put up Schuldschein as collateral to QE, so we can hardly compete and provide premium for our clients.

We find it difficult to invest on those markets and might need to rethink the way we work. We need to work in partnership with the banks, with them originating transactions for us. We don’t have the same business model as banks with their relationships and large networks. We don’t have a side business with corporates. So we will never be able to compete on pricing with banks in the Schuldschein market.

globcap
: Have investors had to change their spread or yield targets since QE? 

Vallière, Amundi: It’s no secret that margins have come down across all risk categories. But investors come to us not only for extra premium over a similar credit they could have bought on the listed market. 

They come also to us to secure diversification in a product with the right structure from companies that are not liquid names. They want to be remunerated for this illiquidity, for the complexity and sourcing. Investing into companies that issue private debt is usually much more complex than investing in traditional fixed income. As investors we have a lot of waivers and amendments to manage every day, around 15% of our portfolio.

You need to be remunerated for that. You need to have a lot of people that sit on an asset management committee. They are a fixed cost base to incur if you want to be active and do proper work on those markets. So we need to deliver this extra premium with the right structure and risk/return if we want to have a viable long term business model.

Paran, ING: I’d like to come back to the question of format. In France we have been increasing the robustness of documentation in the Euro PP format and have been having a hard time expanding. But I think it’s the opposite with Schuldschein. Maybe the Schuldschein market hasn’t been concentrating that much on documentation. We hear that it can be as robust as we want but, in fact, I’m not sure it’s as robust as some investors would wish. This is also a market that has been expanding. So I think issuers have been a little bit opportunistic, going to the easy market. They have better pricing in the Schuldschein market and the documentation has been easier. So I think format is a real issue and might explain why Euro PP has not been for everyone.

Vallière, Amundi: Our point is not that we don’t care about the format. Our point is that we care about all the protections and provisions in a deal’s structure. We are convinced that we can have exactly the same protection in a loan or a bond format. We can have exactly the same clauses in both.

Paran, ING: So if an issuer could choose whatever format they wanted, you would be indifferent?

Vallière, Amundi: We would be agnostic.

Tourmente, AXA IM: But that’s the reality. The issuer, in most cases, is choosing the format. 

Lemardeley, UniCredit: The issuer, to me, chooses market depth as well. And one of the weaknesses of the Euro PP market so far is that there aren’t many Antoines, Renauds and Thierrys active in it. Investors that I would characterise as mid-cap credit accounts are scarce. That is not the case in the Schuldschein market, where you have an investor base of 80-100 names, which are banks, I agree, but which are used to going through the credit analyst process. That’s, to me, one of the main weaknesses of the Euro PP market and that’s why the larger midcaps, at the moment, prefer to go to the Schuldschein market.

Vallière, Amundi: I’ve never seen a deal fall away because of the format. Both from an investor and from a borrower perspective. I’ve never seen a deal not being done because someone strongly wanted to issue in the US PP format whereas the other wanted to buy Schuldschein. Never seen it. 

Calixte, BNP Paribas: Yes, I don’t think it’s anything to do with format. Most times when we meet investors the discussion is mainly about credit, maturity and clauses. My guess is that it’s more a question about expanding supply and finding new opportunities for investors. And that’s where I think the Euro PP market can grow.

Tourmente, AXA IM: Yes and no. How many investors are really qualified to buy Euro PP? 

Calixte, BNP Paribas: There are enough. The issue is more supply than the demand. We are not managing to provide enough supply right now because for a corporate, it’s so easy to issue a Schuldschein, a bond or a loan. But it’s true that, to somehow get yield, people are moving into very different risk environments. Because you’re right, competing with banks on pricing right now in Schuldschein? There’s no point.

11.4

Maspétiol, Aviva Investors: Sorry, the reason why issuance is growing on the Schuldschein market is because of the pricing.

Calixte, BNP Paribas: Yes. 

Maspétiol, Aviva Investors: If a French corporate is using the German format, it’s simply because of the pricing.

Calixte, BNP Paribas: Pricing, and the documentation as well. 

Paran, ING: Of course. You’re not in the hands of three or four investors. 

Maspétiol, Aviva Investors: Don’t tell me that they are ready to pay more to use the Euro PP format.

Calixte, BNP Paribas: No. 

Maspétiol, Aviva Investors: They just want to have more flexibility and pay less. If I was a CFO...

Calixte, BNP Paribas: You’d do exactly the same!

Maspétiol, Aviva Investors: Yes!

Schommer, Helaba: But is it true that they pay less? Really? Look at corporate bond spreads.

We have lost business because of corporates issuing bonds due to the QE programme. 

Maspétiol, Aviva Investors: In our view, risk is not properly remunerated today. Pricing is driven by liquidity. So Schuldschein issuers get lower pricing because of excess liquidity.

Vallière, Amundi: Staying on the Schuldschein market, last year there was €26bn of issuance. The 10 largest transactions were in excess of €500m and represented €9bn of volume. Those transactions were clearly investment grade.

But then you look into what the real Schuldschein market is, you see that it’s not an investment grade market. It used to be an investment grade market, back 10 or 20 years ago, when it was a quasi-sovereign market. But some investors and banks are still acting as if it was exactly the same. So this is probably why some investors see deception. Because you see some companies that are not at all investment grade, that are crossover or high yield, issuing today at conditions, both on pricing and structure, that are not adequate for their risk profiles.

Tourmente, AXA IM: I’d like to add just two elements to the discussion. The first one is that as investors we are looking at credits on a standalone basis. The credit needs to pay on a standalone basis. And at the moment, I think we’d all agree that in Europe, regardless of the format, that is not the case. 

We find transactions that are good transactions, but we are working hard to find those transactions and there are much less of them than before. Volumes are not satisfactory. That is the result of having a supply and demand imbalance, of having banks that came back very strongly into this market.

And the Schuldschein market, to me, is a reflection of this. I don’t want to be tough here, but I think some banks investing in the Schuldschein markets are still searching how to create their next business model. They don’t seem sure what to do. So they are actually going back to what they know how to do best, which is lending. But some of them are just lending at very cheap rates, without the structure to cross their products. And they are subsidising loans to a level that as investors, we just can’t see value in. 

Secondly, linked to what Thierry has said, in European private placement markets, many investors are shifting from investment grade perceived credits to below investment grade or crossover credit, in search for yield. And they are doing that, hoping to get the same kind of yields that they used to get two or three years ago.

But some of them don’t realise that they are taking much more risk and that these credit profiles that are below investment grade, can’t be done on similar documentation.

They cannot be done with Schuldschein typical documentation. Sometimes they cannot even be done with the Euro PP format, or with no covenants. My fear is that in these kinds of migrations from better credit to lower credit, to preserve investors’ yields, is going to cause some damage. 

The economic cycle is not too hard at the moment but it could tighten and that’s a concern. And that’s exactly why we try to be very sophisticated in our approach to credit, in our due diligence. Because we are here to deploy capital in the long term, we are here to avoid mistakes and to avoid defaults on a portfolio that frankly doesn’t pay enough to allow for defaults. And a portion of this market is not moving in that direction, the right direction.

Schommer, Helaba: I agree that investors are going along the curve to buy longer maturities and moving away from investment grade. But I wouldn’t say that it’s typical in Schuldschein. The opposite is true because normally the savings banks investing do their own credit assessment, make their own credit analysis and if they invest, they have judged it as investment grade, and it is. At Helaba we only issue or arrange deals that are judged to be investment grade by our internal model. 

Paran, ING: I’d like to come back to format and ask the investors a question. Are you ready to accept Euro PP deals that are drafted with Schuldschein-style documentation?

Because I’m very disappointed to hear that you don’t make any distinction between the different formats. A lot of effort has been put into Euro PP documentation to protect investors. 

Tourmente, AXA IM: We are not saying that.

PP_17_11.5

Vallière, Amundi: I said that we were agnostic in market and format as long as we have the right structure for the right rating grades. 

Paran, ING: We believe that you can have the right structure within all the markets. 

Vallière, Amundi: Exactly. This is exactly what I was saying. For instance, in the Schuldschein market, you work on a bilateral contract. You can draft exactly what you want. 

For instance, this year, we executed a bilateral transaction with Helaba. There was someone advising the company that did not have the capacity to properly structure a transaction. Then as Helaba had a strong relationship with the company, we managed to finally get the deal done on a bilateral basis with them. 

But we agreed to do it as a Schuldschein because we liked the credit and we managed to get exactly the structure we wanted. It could have been done in bond format. It would have been exactly the same for us. As long as we have the right provisions and undertakings in the documentation. 

Lemardeley, UniCredit: I wouldn’t stress the bilateral nature of the Schuldschein market too much because apart from special private placements which are done with only one investor, we have a real market here, with 80-100 investors. And the way it is built is very much in line with what we see in the bond market. And that’s why from an issuer’s perspective, it is so efficient in terms of pricing, because you have price tension. 

That’s also why there may be some weakening in legal documentation. Again, you have a real market with tension and imbalance between demand and offer. Sorry, but to me this is the weakness of Euro PP. You have many issuers eager to print, you have many arrangers or potential arrangers – probably too many arrangers – but then, when it comes to finding actual demand and an adequate investor base, you don’t have enough qualified and specialised investors.

That’s why it is very stop and go. Some investors will go there for one transaction and will find the yield interesting or in line with their targets. But otherwise, we still don’t have the consistent investor base that would ensure growing volumes in coming years. But it’s a very young market and let’s see also the positive side: granularity. And we are also seeing some repeat issuers. That means it works.

Calixte, BNP Paribas: I totally disagree about the investors.

Maspétiol, Aviva Investors: I agree, we see a lot of competition from other investors. 

Calixte, BNP Paribas: Yes, there is plenty of demand. 

Maspétiol, Aviva Investors: Just coming back to your point, Thierry, I totally agree with you. I think what is important is the content of our documentation. We don’t say we won’t do Schuldschein or whatever other product. We do whatever format. Again, what is important is how we can shape the transaction from a risk-adjusted reward perspective.    

Maspétiol, Aviva Investors: We convey three messages to our end investors. First, given the market environment, there is no pressure to invest. If we have to make a stop for a couple of months, we will do it. We have to be very disciplined, that is the second message. I think we share the same values with Amundi and AXA. We are very strong in our credit analysis, and we want to keep discipline.

And the third message is trying to be agile. Identify the right transaction, not to escape from the traditional Euro PP market which doesn’t, for the time being, offer attractive transactions. But to look for interesting transactions in other markets. We strongly rely on you guys, the intermediaries, to identify those good transactions. 

11.6

Tourmente, AXA IM: AXA is very similar to Amundi and to Aviva. We are all in this market to do transactions that are well structured and that show an adeuqate risk return profile.

We can deploy really significant tickets to actually build a relationship with the corporates and to be there for the long-term, understanding the management, getting close to the business, doing the due diligence, and being there through a cycle. All this is available, provided that the transaction is well structured and priced on a standalone basis.

Now, at the moment, we don’t see enough of those transactions. So we are position savvy, looking at the markets on a more opportunistic basis, so that when we find the transactions, we like we do them. I’d also like to answer your point, Edouard, about the Euro PP market. From my point of view, I see a lot of competition.

Calixte, BNP Paribas: Too many investors, yes. 

Tourmente, AXA IM: Yes, too many investors on the Euro PP market. There’s probably 60 of them at the moment. And frankly, I’m happy to hear Thierry’s and Antoine’s views on these markets. We have the capacity to do these deals on a standalone basis, alone, for up to about €200m. If you want to anchor a deal with the three of us around the table, you probably have the ability to do a deal of around €500m. And I think we’d be pleased to deploy capital for a good corporate around those levels.

So I don’t think there’s an issue of investors and format. And on the format, it’s not that we don’t have a preference to buy under a certain format. It’s just that we know by experience, having done transactions for Euro PP, bonds, listed or not, loans, US PP and Schuldschein, we know we can negotiate strong enough documentation on a case by case basis. 

Vallière, Amundi: One point I’d like to add is that we investors here today are not boutiques. We are very large asset managers that have clients across the various strategies of Amundi, so we are not allowed to do crazy things. Because I think that you here on the arranging side can see differences in our approaches, between the largest asset managers and some of the boutiques. In the way they approach the market, the way they undertake their due diligence, the way they structure a transaction. We suffer a bit from that. Hopefully, things might evolve because in this market, to be efficient, you need to have a lot of people that are data crunching, doing the analysis, so you need to have fixed costs. 

This is the reason why you’ve seen a bit of consolidation on the buy-side, for instance, in the LBO market. You’ve seen Investcorp buying 3i. You’ve seen GE bought by Sumitomo. 

Because you need to have a critical mass, because you need to have a lot of credit analysts to perform, to do the due diligence. And I think that’s not the case with all the players today, and with all those boutiques. Some of them are working very well, but there are very few that work properly, and that have exactly the same approach that we have. 

It’s an issue which is a bit frustrating for our teams because usually, at the investment committee, we are told that a transaction doesn’t fit with our strategy. But given market conditions, the same transaction would be still find a home with a boutique.

Paran, ING: But you don’t concentrate on the same kind of issuers as boutiques. They seem to focus more on SMEs whereas you look more at the blue chip corporates. 

Vallière, Amundi: We have deep pockets and we are managing several strategies and several funds. We have started investing in companies with €75m of sales, so relatively small companies that are absolutely not investment grade companies. For us, there is also no limit in size. So we can deploy between €5m and €10m to in excess of €100m or €150m. Or up to €200m if the transaction is really, really good. But unfortunately, we don’t have a lot of those opportunities coming to the market. Last year we did only one transaction like that, where we were able to invest in excess of €100m on a bilateral basis.

Calixte, BNP Paribas: Coming back to your point, Edouard, I definitely think there are consistent investors in the Euro PP market and I’m definitely confident that for the right price and structure, we can definitely put big money on the table. But yes, there are a limited number of opportunities.

I think where you’ve got a point is on standardised documentation. I don’t believe that it is fully possible because Euro PP will be always tailor-made, especially if you look at more structured deals and crossover-type credits. 

But where we should try to share best practices with Schuldschein or even USPP is on the digitalisation or industrialisation of the process. I know people may think it is better to have a bilateral discussion or a club deal. But I also think that the whole market and volumes will benefit from becoming more standardised. Because there is plenty of appetite and plenty of investors — but sometimes a corporate will tell me that there are too many investors and too many arrangers. Frankly, everyone is pitching. When you launch a Schuldschein or US PP transaction, you know the structure you’re going for and that the price is going to work. Then the question is, do you raise €100m or €300m. For Euro PP, some corporates are being pushed by some arrangers to do very aggressive things when we perfectly well know you investors are not going to go into a subordinated transaction or buy a deal without certain covenants. 

But people are trying a lot of things. And maybe for you investors studying the transactions, you like some credits but don’t like their deal structures. Sometimes arrangers bring certain issuers because they are under pressure to win mandates and know that the credit might be borderline. We’re losing some mandates because boutiques are taking them.

And obviously corporates are in their essence pretty opportunistic. I think that’s where we need a solution, I don’t know if it will be more standardisation or processing but maybe digitalisation could help.

Paran, ING: Arrangers will disappear because it’s not profitable anymore. But I agree with Fabien on digitalisation. We still haven’t really seen any defaults in these markets. And I think the day where we get standardisation will be the day where we will have a default. Maybe on the Schuldschein market. I think you’ve had some in the past but they came from local credits. We still haven’t seen an international issuer default on the Schuldschein market.

Schommer, Helaba: No. 

Paran, ING: And I’m curious to see how it will go that day. Maybe then we will discuss documentation again in a more thorough way. Because Euro PP has at least achieved that, robust documentation. And for the moment, it will stay the same and there won’t be any standardisation. But if something goes wrong, I wouldn’t be surprised if we have more of a discussion about format. I don’t think that the Schuldschein market is under EU regulation. You can do it in a bond format, but you’re not obliged to do it. 

And I wonder why the Schuldschein market is the only market that doesn’t have to follow the EU regulation when it comes to prospectus and documentation. So yes, you can customise it the way you want, but you’re not obliged to do it, and it’s a big difference. And so when it comes to crossover names and small and mid-corp deals that are done on documentation which is written for investment grade names, that is where the risk is. 

For local names, the German government will always be there to provide a bail-out. But if we have an international borrower defaulting, will the German government help an international borrower defaulting and bail out the local banks? 

On digitalisation, on the Euro PP side, there are still improvements to be made. I think it is robust but the market has maybe been too focused on that robustness and the documentation and the process is very heavy. It’s a bit old-school, those NDAs, when you have to sign an NDA with a lawyer and then you have to sign an NDA with investors. I think there’s a place for digitalisation. The tools are there and technology is there to standardise  and digitalise things. Maybe we could think about a digital room where we share documentation and all the rest, and make it easier for investors and for issuers and try to make meetings more easy, more smooth. Today, it’s a bit lousy. It’s a lousy process. 

Tourmente, AXA IM: I’d like to comment on your first point Maxime, which I think is a great point, because we have a joint responsibility as investors, banks and other stakeholders in these markets to establish standards, especially in documentation.

Paran, ING: Definitely. 

Tourmente, AXA IM: We’ve pushed for those standards and have been very vocal in developing the Euro PP market and its documentation. But currently, as we’ve said for an hour now, this is very much an issuer’s market. And there is only so much you can do. 

globcap
: Renaud and Edouard, you referred to the number of arrangers in the market. And Edouard, you suggested maybe some may have to drop out. 

11.7

Lemardeley, UniCredit: They will.

globcap
: Could larger investment banks cede share on smaller transactions to the smaller firms, like the UK equity arranging market where smaller players like Numis take care of smaller transactions? 

Calixte, BNP Paribas: There are plenty of arrangers out there. But even in the established markets, like Schuldschein or USPP, I don’t think we have seen a rationalisation of arrangers. You’ve got obviously the top five to 10 guys working on big things, but you still have the ability for some to play between the lines on smaller transactions. 

My guess is that we’ll see more direct lending. We’ve seen that with USPP. So when you asset managers are familiar with a company and already have a deal done with them. If they need an extra €30m or €50m, obviously we’d push to be in there but we know perfectly well that you can do that on your own. 

I am also seeing a trend resulting from investors’ desire to be perfectly aligned with banks, of more tranching of syndicated loans to institutional investors when it makes more sense — because of the size, because of the structure, it’s much easier for everyone. That’s a trend we don’t capture in the overall volumes, because it’s a private loan. It will be difficult to capture for some boutiques as well because it is being arranged by the larger banks.

But could big banks continue to compete on €20m-€30m deals, when you’ve got a lot of smaller investors, smaller arrangers and boutiques that want to do the deal? Again, yes if it’s a bilateral process and a quick transaction, which is great. But usually, the smaller the deal the more difficult it is, just because the credit by nature is more difficult to analyse, the structure is more difficult and usually the package of information is not prepared and ready from the corporate side.

So obviously there is some work to do, both on our side and for investors. Because even if we try to package everything well, usually it’s not perfect. You’ve got lots of Q&A and work to be done. So there’s a question about the business model. At the same time you investors are trying to find remunerative deals to get done and get some value. I think we’re in the same search to find the best business plan on this. 

Lemardeley, UniCredit: You also have to bring the politics into the equation as there is some political pressure to develop this market and make sure smaller companies in France will be able to access the market. 

Paran, ING: It’s very difficult to make it a viable business for SMEs. Because on the investor side, as you just mentioned, and on the dealer side, it’s a lot of work. It’s really a lot of work and it’s very specialised. And taking risk for the illiquid paper of a small company requires a lot of effort. And fixed cost is always mentioned, for issuers that are not regular issuers, transactions that are too small.

Making fees on €30m or €40m deals is not easy. So with the fixed cost and the expertise that is required, revenues are difficult to make. So I think it’s a challenging business model, a very challenging business model.

globcap
: What are your predictions for the private debt market, in particular once QE stops? 

Tourmente, AXA IM: I have a wish and I have a concern. My wish is that we see increasing volumes, that we see private placements priced adequately on a standalone basis with robust documentation and banks stepping back, to an extent, from their lending activity while investors step up in creating more disintermediation. Because I still believe we are far from where we should be.

11.8

Paran, ING: Yes, I agree. 

Tourmente, AXA IM: In Europe, the ballpark numbers are 80% intermediated financing, less than 20% disintermediated financing. That is compared to probably the opposite ratio in the US. In the US, there are fewer banks, with more defined business models and investors have just stepped in and taken a large portion of the market on properly priced credit. 

And I think issuers benefit from that in the long term. They’ve got a much more balanced capital structure, they just don’t rely on banks for their lending activities, they’ve got pockets of liquidity they can target, and that’s what everyone should target to reach better equilibrium between all parties. 

We all, as investors, see this as a difficult market but we still find responsible management situations, where the issuer has memories of previous cycles.

Sadly, there are not enough of those managers who are willing actually to pay a premium to deal with experienced investors. And I think the European market is not there yet.

But this is probably a dead wish for 2017. Because my concern is that unless there is a credit crunch or a shock in the system, people will not change. We’ve seen the first wave of disintermediation post-Lehman. We are very likely to see the second wave after another credit event, where people will realise that they should have pushed in another direction and there will be defaults. People will see that it is not easy to operate in this environment and corporates once again will lack access to financing. 

Sadly, people will most likely learn the hard way. I think that’s true for investors, it’s true for corporates, it’s true for banks, it’s true for all the stakeholders in this market. 

So I’m not very optimistic about this year in terms of the level of opportunities we are going to see, the volumes coming with adequate documentation and pricing. But as Antoine said, we don’t need to invest if we don’t find the right opportunities. We can be patient and we will be, if we don’t find the right volumes and so on. 

We invest on behalf of investors who are locking in for seven to 10 years, sometimes longer — plenty of things can go wrong during this period and we need to preserve their interests. We need to find the right balance, with the issuers and with the banks, to develop this market in the long-term, with responsible attitudes towards increasing disintermediation in the European market. 

Calixte, BNP Paribas: Last year was a great year for the development of private debt products. In the long term, the ending of QE and the LTRO should hopefully stabilise conditions. Right now, especially on the Euro PP market, people need to have memories of previous cycles and be prepared to pay a premium to buy some diversification. But in the long and medium term, I’m very positive. I think these markets are here to stay. Investors are there, looking to deploy real money for seven to 10 years and beyond. That’s not going to disappear overnight.   

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