Ever since the European Union’s Market Abuse Regulation (MAR) came into effect last year, bond market players have been treading very carefully. Complying with regulation that many market participants fear but still do not fully understand has been a concern for bond syndicate desks executing public deals. However, it has also left many private deals dead in the water, as investors steer clear of anything close to wall-crossing.
“Structuring a private placement through reverse enquiry is fairly easy but if you start to solicit interest based on an issuer's private input, then you hit MAR regulation, where you have to wall-cross to prevent market abuse happening,” says Kris Devos, head of global bond syndicate at ING. “That is possible but more difficult, as many investors are not that willing to be wall-crossed on private placements. The new regulation is stricter than before and the way it has to be enacted makes it more difficult for existing public issuers to engage with investors in private.”
Investors’ nervousness has mainly centred on privately placed EMTN deals, usually sold with unconventional maturities and currencies and bought by mainstream public bond accounts. For those investors, the risk of having to be wall-crossed for a small private placement by a company with an established public curve is being locked out of trading that company’s bonds. Or equity. It is not a trade-off many are willing to take.
“Private placement bonds can still be a convenient tool and continue to be a great source of funding for longer maturities and other currencies than euros and dollars,” says Devos. “However, seemingly stricter regulation is not helping that business at the moment and doesn’t give issuers much comfort to engage themselves in the product.”
End the uncertainty
With MAR still in its first year and uncertainty about its implementation still reigning, many bankers hope procedures will develop to give investors the confidence to return to the market. That would be to the buy-side’s benefit, as well as issuers’.
“For investors, there is the beauty of buying the exact maturity they want in a favoured credit of theirs, with the allocation that they would love to have in their portfolios,” says Christian Reusch, head of global syndicate and capital markets at UniCredit. “Granted, they don’t get the same sort of secondary market liquidity as a public issue but if they are long-only investors that doesn’t make much of a difference.”
Of course, while private placements in EMTN format may be on uncertain ground, another private debt product — Schuldschein — is booming. Corporate issuers have found a versatile, lightly documented funding instrument to deploy alongside public issuance plans and they have hit the market with verve.
“The last two years have seen large multinational corporates using the beauty of the Schuldschein market, a private instrument that can be used for large scale transactions,” says Reusch. “With the benefit of diversifying one’s maturity profile and in volatile times getting pricing that is flat to, or slightly above, their public curve.”
Schuldschein volumes have caught the attention of anyone with an interest in private debt over the last two years. Issuance has grown year-on-year since 2013, last year increasing from 2015 levels by €6bn, to reach €26bn, according to Helaba data.
Gaining a pricing advantage on the public market has been difficult since March 2016, when the European Central Bank crunched spreads by unleashing its Corporate Sector Purchase Programme.
But the Schuldschein still offers big issuers a different investor base. They can use the product, not just for run of the mill funding, but also the flashier business of M&A financing. French kitchen appliance maker Groupe SEB last year raised an €800m Schuldschein to fund its acquisition of German firm WMF.
“Schuldscheine can be complementary to public bonds, fitting into special maturities or funding needs,” says Klaus-Peter Schommer, head of syndicate at Helaba. “In this age of QE-driven bond spread compression, it is harder for Schuldscheine to compete with corporate bond spreads but there are issuers who like to diversify their investor base and especially in M&A-driven Schuldschein issuance, considerable deal volumes have been reached.
“This business is an alternative that frequent bond borrowers can take advantage of from time to time.Perhaps with maturities that are outside typical bond maturities.”