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Corporate BondsPrivate debt

Flexibility helps private debt hold its own in a world of QE

London sits at the intersection of several private debt markets: the US private placement, Euro PPs, the Schuldschein, Euro medium term notes and direct lending. Each is different, but all exist in the same economic environment, in which banks are eager to lend and pricing in the public bond market is highly attractive to issuers.


Yet these conditions have not brought back the pre-crisis situation, in which private placements were a little known club for aficionados. Quite the opposite: corporate private debt markets are bigger than ever, and set to grow further, as they attract more money from investors.

GlobalCapital brought together a group of bankers, issuers and investors in London, with varied private debt experience, to explore how these markets are changing and interacting.

Participants in the roundtable were:

Simon Fretwell, head of private placements, 

M&G Investments

Morris Gutermann, director, corporate origination, debt capital markets, Helaba

Mark Kildea, finance director,

Howard de Walden Estates

Konrad Merkofer, MTN and PP syndicate, UniCredit

Richard Proudlove, head of MTNs and private

placements, ING

Jason Rothenberg, managing director,

MetLife Private Capital Investors

Simone de Wit-Huijs, vice-president, structured finance, Rolls-Royce

Frédéric Zorzi, global head of debt syndicate, BNP Paribas

Jon Hay, moderator, GlobalCapital

Private debt in a world of QE 

: Monetary easing has led to very low yields in the bond market, and easy access for companies to bank funding. Has that changed the function of private debt for companies and investors?

Jason Rothenberg, MetLife: The banking markets do have a lot of liquidity, and there’s a lot of interest in the bond markets, but they don’t serve all borrowing needs for all companies. If a company doesn’t have ratings, for example, it’s less likely to get efficient execution in the public markets. And if it wants to borrow longer than five or six years, it probably needs to move away from its banks. 

So private placements remain attractive to companies for the same reasons as in the past. They provide a good diversification for a treasurer, a good complement to bank debt. And they offer a relationship approach, with fewer investors than in a public bond. 

Private placements also offer flexible structures, including the ability to do a mix of various maturities and currencies in a single deal. There is no public disclosure or listing requirement, and companies can get very competitive pricing, as it is linked to the public corporate bond markets.

Simone de Wit-Huijs, Rolls-Royce: I look after the structured financing of our aero-engine leasing joint ventures — we use the private placement market to fund it. For us, private placements are really useful, mainly for the tenor. Our leases are usually for 10 to 12 years. To get bank debt for that period is quite challenging.

Also, the size of our deals is $250m, $300m — you can’t go to the public bond market for that size, it’s just too small. 

And we have a very good, dedicated investor base of 33 PP investors. So it’s quite easy for us to go back to them and do a new transaction. 

Of course, because we have quite a wide bank group, we get pitched other ideas and we look at alternatives, but this has remained the most competitive option.

Morris Gutermann, Helaba: I’m involved in the Schuldschein market. Over the last 10 years, there have been points when the Schuldschein was significantly cheaper or more expensive than bond markets. But in the last three or four years, we’ve been running in parallel. Central bank activities have a lot to do with this.

Above a rating of A-, the Schuldschein is not quite as competitive. The Schuldschein has an invisible pricing floor. Nobody knows exactly where it is. Maybe 40bp-50bp at five years, 60bp-70bp at 10 years? That’s where the bond market can go tighter. 

But we’re happy. The market has doubled in size in the last couple of years. It is expanding internationally and becoming a premier private placement market. 

We’re subsuming a lot of things that used to be more spread out. Euro PP might be one. There is an option for French issuers and investors to go to the Schuldschein market, where more is happening.

Mark Kildea, Howard de Walden Estates: The Estate owns 92 acres of freehold land in Marylebone, which includes Harley Street and Marylebone High Street. Private placements are a major source of how we fund our business. 

Before I started in 2011 the Estate had completed one PP and it has done three since. Before that, the London estates were mainly reliant on short term bank funding, which is a real misalignment when they own assets for a very long time. 

We are a very boring, strong credit, but the financial crisis taught people that just having several hundred millions of debt with a few banks wasn’t the best place to be. 

It was obvious for the London estates to look to the PP market, because we offer incredibly strong credit metrics. Howard de Walden is very lightly geared. But we are reliant on some form of long term funding. The tenor being 10 years-plus is important for us. 

Also, the fact that it’s unsecured. It’s very easy for property companies to borrow money on a secured basis. But all our borrowings are unsecured, and that’s a good place to be. Some large property companies have a mixture of unsecured and secured debt. If you are the unsecured creditor, you have to be sure you totally understand that structure.

But if I was an investor, I would take the view that unsecured is the best place to be. You’re effectively secured on the whole estate, rather than a portion of the assets. 

Now we really only use bank funding to meet a short term need, for example working capital or if we make an acquisition, however we would still look to refinance acquisitions in the private placement market. 

: But interest rates have come down. Have you never wished you had bank debt, as you would now be paying not very much over Libor, and Libor is almost nothing?

Kildea, Howard de Walden: Actually we swapped the issues we did in 2010 and 2011 to floating rate, and the two most recent deals, including the one completed in July 2016, we fixed, and we’re very happy with that.

You can be too cute about these things. Ninety percent of our funding comes from the surplus cash we generate, and to mess around on the 10% we borrow isn’t really going to shift the needle. So we try and do a good job, and get our timing right, but we don’t try and out-guess the market. 

Frédéric Zorzi, BNP Paribas: What, for me, has been a game changer is that many of the big funds have dedicated money to private placements for the first time. The size of these funds has increased dramatically, because investors could not place all their money in the public market. 

For the first time, institutional funds are even coming into typical corporate bank loans.

The USPP has been there forever. But suddenly, you’ve got Asian banks buying Schuldscheine in dollars. Why? I don’t think they are especially keen to buy Schuldscheine, but they want the assets.

It’s a trend, and it’s here to stay, because the credit capabilities of the funds have increased, and they are raising funds for it actively. You’ve got enough now to sustain a genuine investment discipline.

Richard Proudlove, ING: At the end of 2015, and beginning of 2016, all the talk in Europe was about harmonisation of the private placement markets — the Schuldschein, Euro PP, and maybe even the UK PP market coming together under a common documentation, and rivalling the USPP market’s depth. 


Since half way through 2016, that has gone into reverse. The products have separated on the investor side. The Schuldschein and bank markets are being driven by excess liquidity from banks, which are looking for a spread, not an outright return. 

The Euro PP market has got left behind because it is driven by real money accounts, who are still looking for a higher target return, and do not want to invest in these illiquid instruments without getting it.

This has created very clear pricing advantages for certain kinds of issuer in different markets. The Schuldschein sweet spot is investment grade companies below A-, out to five years, driven by corporate banks looking for assets.

The US PP market is providing very appealing pricing in eight and 10 years, because of the dynamics of the cross-currency swap market. The Euro PP market in the middle of the maturity bracket has been squashed a bit by the others. 

The main limitations on the Schuldschein and US PP markets is they’re still, primarily, implied investment grade markets. The Euro PP has been squeezed into sub-investment grade or smaller caps, which don’t find it as easy to access the other markets. 

People got it wrong in 2015 and 2016. They thought that if they created a common set of documentation, magic would happen. And it didn’t. The shape of the markets is being driven by investor appetite, not documentation.

Another point is that previously, investors were reluctant to buy private placements partly because there was no liquidity. But since the crisis, liquidity in everything is drying up. So your compromise by buying a private placement is less than it was in the past. 

If you combine that with the ability to diversify your investment base, and potentially negotiate a slightly improved investor status in line with banks, maybe with financial covenants, PPs begin to seem more appealing. 

Which is why we have new departments at most of the major European insurance companies, asset managers focusing on illiquid corporate debt. 

That will continue. They are setting themselves up not to be constrained by documentation, whether it’s Schuldschein, USPP, Euro PP. What they’re looking for is the right asset at the right pricing. The biggest constraint is lack of supply, or the competition from bank investors, through either bank lending or the Schuldschein market, driving the pricing down below their target returns.

Simon Fretwell, M&G Investments: There’s a big difference between the US and Europe, with the UK somewhere in between. Companies in the States, when they look to borrow, think primarily of capital markets. Whereas in the UK, it’s roughly 20% capital markets, 80% banks. On the continent, it’s probably closer to 10% and 90%. 

In the USPP market the issuance from continental Europe has declined. There was roughly $2.5bn of issuance from Germany in 2012, about $4bn from the Netherlands and France had a spike too. Over the past three or four years, it’s just gone down. 

People say it’s gone to the Schuldschein, but really, it’s gone to the banks. After the financial crisis they would only give a three year loan renewal. Then it was three years, plus one, plus one, and now they do whatever you fancy. 

In response, US PP investors have become a lot more flexible. In the UK, last year, something like 80% of the money raised was in sterling. 

Investment trusts, high quality property companies, housing associations are going out long, 30 to 50 years. They’re going fixed. They’re getting very attractive coupons. So the UK has adapted — it’s becoming more separate from the US PP market. And the continent has recoiled into its shell a little, because it’s got such great banking options. 

The Euro PP grew really well about four years ago. It was fantastic. We thought it was a great French innovation. But it seems to have tailed off.

Has the Schuldschein market cannibalised it? I don’t think so. What’s happened there is investors have come from outside Germany, Austria, Switzerland, so the volumes have gone up. But really, investors will take credit in whatever form. Our main competition is the banks.

But there is still a natural place for PPs. Banks can get to a certain maturity. For public markets, you’ve got to need a certain size. Private placements are there in the middle — and all-in costs are fantastic!

: Konrad, you’re at a commercial bank — are you the villain in this picture, lending too much cheap money to everybody?

Konrad Merkofer, UniCredit: Obviously, the wall of money from central banks has influenced the private placement market. 

As Richard said, the idea of harmonisation, all the products melting together, definitely hasn’t happened. But I believe the big boom in the Schuldschein market for crossover and investment grade issuers has been driven not only by pricing, but also by documentation. 

The segment of issuers rated BB- or lower have stayed in the Euro PP market. But there has been a massive lack of supply, mainly because these issuers have preferred bank financing, at least to a maturity of five years. They can get a rate, which is simply way tighter than the bond market.

That won’t change, until the whole market goes back to normal. That’s where we’ll see the biggest influence from cheap money coming in, and definitely depressing volume in the private market.

But one area where things have stayed the same to a greater extent is private placements issued from EMTN programmes. In the current market, investment grade issuers tend to go to the public market, especially for the five to 12 year bracket. 

But there is huge demand from certain investors for private placements at the short end, and from others, especially insurance companies, at the very long end. For issuers that have smaller funding gaps to fill, that’s an active market. 

MTNs and regulation

: MTNs are always an option for the right kind of company, but why hasn’t it become a bigger thing?

Zorzi, BNPP: Because they don’t need it. Funding is so good in the public market, why would you bother? MTNs are a big market, an important funding source for banks and supranationals. The problem with corporates is not lack of demand but lack of supply.

With the intervention of the central bank, bonds are so low priced. An investor would not pay up for this paper, so it’s at best going to be the same price for the issuer as the secondary market. 

Proudlove, ING: The value for corporate issuers was traditionally that you could get opportunistic funding. It was pricing. But to do that, you gave up an element of control, over timing, maturity, size, currency. Banks and agencies have the flexibility to manage that, with bigger treasury departments and more sophisticated risk management tools.

Throw on top of that, pricing of derivatives for corporates is getting ever more expensive. That is pushing more corporates into ‘I’ll issue what I need, not something I don’t need, which I’ll swap to what I need, for a pricing advantage’. 

Then there are regulatory changes. The EU Prospectus Directive has restricted the flexibility on EMTN programmes. Before, you could do whatever you wanted. Now you need to put a lot more risk disclosure in. That either means you have an expensive document to write, or you restrict it to a smaller set of types of issue.

And since last year, MAR [the Market Abuse Regulation] has potentially reduced dialogue with investors, with the introduction of market sounding requirements. All these things have moved corporate issuers into the public markets. 

The only place left is where the public markets don’t go: longer than 12, 15 years, or potentially, at the moment, two years.

: Has MAR been an issue in other private placement markets?

Fretwell, M&G: No. It doesn’t hit us. It’s more about public debt, sounding investors out ahead of deals. But in the private placement market, we’re purely private side.

New investors arrive

: OK, let’s talk about inflows. Is the market attracting investor money?

Fretwell, M&G: We are winning mandates for alternative credit, which includes a variety of private assets — leases, ground rents, corporate PPs. More narrowly, we’re getting some pure PP credit mandates.

Investors are getting more comfortable with the performance of this as an asset class. Word is spreading. At the same time, they’re stretched in the public market. They want some diversification. They want spread pick-up.

Richard’s argument that illiquidity doesn’t matter as much any more has been a slow message to come through. But yes, maybe people are focusing on it now more with Solvency II, in terms of their risk models, and whether there really is liquidity in the public markets. But certainly, no one argues about that message any more.

The money is coming from pension funds and insurance companies. It’s long dated and there’s a variety. Some want higher quality, and some want more yield. We’ve got inflation-linked mandates as well.

: Can you find enough product to put all this fresh money in?

Fretwell, M&G: I don’t think either Jason or I would say we’re able to find enough. We’re finding sufficient. But it’s extremely competitive — more so than before the last market meltdown. 

And there are good reasons. The good news is getting out there. A lot more credit analysts have been trained up. 

Rothenberg, MetLife: We’ve been managing third party money in private placements for about eight years. We are able to source a sufficient flow of good deals, but in order to do so we have expanded our teams in recent years.

Even though last year was a record for USPP issuance, more and more investors are interested in the product. So it can certainly feel at times there’s not enough volume to go around. But the influx of interested investors is a positive and should help the PP market continue to grow over time.

Another point new investors are coming around to is the value of covenants. In USPPs these are very important, and have resulted in a very favourable loss history over time, relative to comparable public bonds. So it’s not only the additional pricing you get. You also get the value of covenant protection, which, over the long run, can certainly help quite a bit.

A hot market

Zorzi, BNPP: That’s an important point, because private placements include some products that are covenanted for small companies, and some that are very covenant-light. It’s a very bullish market now, where investors accept a lot of things. But the real existence of this market is going to be tested, during the next cycle. Because some companies will go down, with no protection for investors. I’m talking about deals outside the core USPP market, which has been there through several cycles. 

Fretwell, M&G: Yes, covenants in the USPP market are almost, but not quite, a 100% rule. That’s what we regard as a private placement, that it has some form of financial covenant.

Kildea, Howard de Walden: We’re family-owned and they have an aversion to a large debt quantum. I’d probably feel more comfortable with a bit more leverage, but we’re well inside our financial covenants. If I was lending money for 15 to 20 years, quite honestly, I’d want some covenants.

: Simone, you did your last deal late last year. Did you feel this competitiveness among investors, and have you been able to take advantage?


De Wit-Huijs, Rolls-Royce: We did a very good transaction last year. For us, it was very important to get delayed funding. That makes it difficult for some investors. For this transaction we only went to our existing investors, because we didn’t want investors to put a lot of time in and end up with a very small allocation. So then we had the small subset of our existing investors that were able to do delayed funding. But we had a very good execution. I was very pleased with the result.

We always have a beauty parade, where our relationship banks come in and pitch. That gives us quite good guidance on where we expect the pricing to be, and we have not been disappointed.

Kildea, Howard de Walden: Our experience was an interesting one last year, because the timing was awful — it was in the lead-up to the referendum. The uncertainty over Brexit had created an opportunity for us to buy a building and we wanted to refinance it.

We didn’t want to force the issue, because it would have meant that the narrative was on ‘why are you issuing so close to the vote? Are you worried about it?’ But we really tested the market. 

After the vote we were in the crosshairs, because a lot of the US institutions were reading in their newspapers that London property funds were gating redemptions for their investors. 

We had always planned to issue the week after the vote. We were London, property and sterling — for US investors, it was a bit of a challenge. Some of our existing lenders didn’t participate. It was totally for portfolio reasons. They just weren’t touching the UK. 

But most of our existing group participated and we picked up one new investor. The spread was higher than before. But the overall rate, which is the most important factor, was lower than indicated before the vote. We had a great group of institutions. It was 15 and 20 year money, and it made perfect sense for us to do it. 

It was a good test of the market’s resilience. The attraction of the US market is it stands up in adversity.

: In all the different private placement markets, has Brexit caused a change in attitudes to UK borrowers? 

Merkofer, UniCredit: In general, not so far. We had investors just before the referendum who were quite hesitant to buy UK names. But then, it normalised again afterwards. They waited until July, August. But so far, we haven’t seen any effect really. 

Rothenberg, MetLife: Brexit hasn’t been a hindrance to USPP supply from the UK, though it could be, eventually, if companies become more concerned about growth and delay making investments. But so far, demand has held up well from investors. It’s an issue we discuss in every credit committee for UK companies — what trade barriers might imply, or restrictions on immigration. But we address it as another credit risk, and try and price it in where appropriate. 

We certainly haven’t shut the door to the UK. On the contrary, we remain very active. And I think most investors are, given the kind of demand we’ve seen. I expect the UK market to remain healthy in 2017.

Schuldschein keeps its own way

Gutermann, Helaba: Richard talked about the fragmentation, or divergence, of the private placement markets. It might not be a coincidence that it happened around the time of the Brexit vote. One effect of Brexit might be even stronger resistance in the Schuldschein market to turning it into an Anglo-Saxon kind of product documentation.

Because the Schuldschein is a flexible, very simple product. It’s an extract, based on the German civil code. So a lot of things don’t need to be repeated in the Schuldschein document itself. That’s why we manage with 12 clauses and 10 pages. There’s always incredulousness when we talk to UK customers as to how this can be so simple: ‘What’s going on in Germany? Don’t you have your standards?’ We do, but they are hidden from view in the actual documentation. 

I think this harmonising probably won’t happen now. And we, as a Landesbank firmly anchored in the public sector, have a very strong self-interest in preserving the Schuldschein as it is — as mostly an investment grade product.

The growth of the market obviously attracts a lot of attention, and there will always be sub-investment grade companies that try to enter the market though a back door.

We’ve been careful not to dilute the product in that way. In fact, we established probably the most extreme version of the product at the end of last year, for an aircraft leasing company that didn’t even have three years of accounts, and had very light covenants.

But this marks, for me, the extent to which the Schuldschein will go. This issue was, thankfully, absorbed by several East Asian investors, so that worked out quite well. But we wouldn’t give it another go right now. We would try to keep this product investment grade.

Covenants were mentioned, as well. We try not to deal in covenants, because that’s more adapted to the syndicated loan. We try to really be a reserve bond market, with standardised products and the assumption that this is an investment grade credit, and there will be no waiver procedures and breakdowns in the future. 

: And most of the deals, therefore, don’t have financial covenants?

Gutermann, Helaba: About half the issues in the last six months had some kind of financial covenant, usually something like a leverage ratio to Ebitda of 3.5, or in some rare cases 3.0, and they are usually already in the client’s revolving credit facility.

That’s the only financial covenant we think is useful. Sometimes there are variations, but that is mostly what you’d find. If the issuer wants to include a financial covenant, it’s a marketing enhancement. But we wouldn’t, of regular investment grade issuers, ask for covenants. A large issue, like Volkswagen’s recent €900m, would not have one.

We think sticking to the core values of the Schuldschein is what serves the market best. There will be other markets that serve other needs, the sub-investment grade. 

Last year, we were approached by a Nordic company that was trying to do a private placement with a foreign fund manager. Their banks weren’t getting the job done, so they asked if it was possible to do it as a Schuldschein. They had issued a Schuldschein before.

Two months later, we’d got it done, with the same fund manager. We replaced whatever was going on, in terms of private placement documentation, with our Schuldschein documentation. It seems to be a good template, even for fund managers that are not part of our focus.

And I’m thinking, why shouldn’t fund managers be a core part of the investor base? It’s 90% banks, with insurance companies for longer term issues. But if fund managers manage to set themselves up with the credit analysis, it’s as good a product for them as any.

Proudlove, ING: Where do you see the regulatory environment going for the Schuldschein market? We have the EU Prospectus Directive, and MAR, which is putting constraints all over listed transactions. In many ways, the Schuldschein market seems to be under the radar of a lot of the regulatory changes at the moment. Do you think that can continue, or will the market come under scrutiny as it grows?

Gutermann, Helaba: It is already under scrutiny. There’s no way to double the market and remain under the radar. But we, as a Landesbank, are working on it through the public sector banking organisation in Germany, the VÖB.

On the investment grade quality of the Schuldschein — we are owned, 88%, by our savings banks. So we cannot offer something that Helaba itself cannot purchase to our savings banks that are really beholden to us, in terms of credit analysis. We just cannot be adventurous, in terms of credit quality. So that is a brake on how far we would venture outside the core universe.

Merkofer, UniCredit: An important success factor for the Schuldschein is the way a deal is launched. You usually come out and market it as a multi-tranche, with, pretty much, pre-agreed documentation. 

In the Euro PP market, the trade might be smaller, say €50m. You identify a core group of potential investors. But there is no standardisation, in the sense that documentation is pre-agreed. Everybody comes with their own idea of what structure they want, what kind of covenants are needed. There’s much more work involved for investors. Whereas on a Schuldschein, with pre-agreed documentation, you like it or you don’t, and then, pretty much, that’s it.

For a lot of the investment grade or crossover issuers, that has been one main reason, not only pricing, why they have gone into the Schuldschein market. On the Euro PP side, you’re left with more complex, smaller companies, maybe with lower credit profiles.

: Fred, your bank is one of the authors of the Euro PP market. Have you been disappointed it hasn’t taken off?

Zorzi, BNPP: No. What was the purpose of the Euro PP market? It’s fulfilled a need: financing the economy. A lot of funds were set up with this clear goal. For us, the goal was not to create a mega-structure, but to do what we’re supposed to do, and help, mainly, French funds finance French companies. And this is working well. 

But that doesn’t mean these companies are exclusive to one market. Like every new market, there’s a lot of hype around it, but it will continue to develop. 

It’s completely different from a Schuldschein or a loan. It’s very tailor-made, and I don’t think it was ever going to be a competitor to the USPP market.

Everyone knows French insurance companies have an average life, in their portfolios, of seven to eight years, where the USPPs are usually 10 years-plus. So, de facto, you are targeting a different kind of deal. 

It doesn’t need to be a multi-billion market to continue to exist and evolve, because there’s a purpose to it.

USPP investors hold firm

: Jason, have you had to relax your covenant requirements in this very competitive market?

Rothenberg, MetLife: No. I think it’s a nice result in our market, that despite the growth in competition, the core financial covenants haven’t seen any erosion. Maybe a few items have been weakened at the margin, more minor, non-financial terms. But the core financial covenants, I think the investor base still appreciates the importance of those, despite a very competitive market.

Fretwell, M&G: Something like 70% or 80% of our market is repeat issuers. When they’ve got financial covenants, they’re not going to complain about keeping them. New issuers come, and they know what they’re getting into.

What has been different about this cycle, since 2007, 2008, is that so many people got burnt in the last cycle. They relaxed pricing. Then they thought: ‘I’m willing to relax my covenants, to see if I can get a better allocation.’ And then, come the downturn, they got burnt. 

So everyone now knows in the big institutions that financial covenants are the only thing that marks us out as different from public bonds. We may have the same level of defaults, but when things go wrong, our recoveries are so much better.

So this time, there are calls for relaxation every now and again from some of the USPP bankers, but happily, they’ve fallen on deaf ears.

The driver for financial covenants is not that we want to have the whip hand. It’s that we want to sit alongside the lending banks, not the public bonds. 

: Simone are you not tempted by this covenantless Schuldschein market?

De Wit-Huijs, Rolls-Royce: Not really. We are a repeat issuer, we have covenants. I have no issue with keeping them. We are very well within our covenants, and I’m comfortable with them. So no, I don’t have an issue.


Kildea, Howard de Walden: It’s interesting, the Schuldschein. I’m not sure I’d let a property to somebody who didn’t have three years of accounts. 

So I think you want strong covenants. I see it as a symbiotic relationship between investor and issuer.

I’ve been strongly marked by the financial crisis. I was in a different business that was more heavily leveraged, and lenders disappear, or you don’t know what they’re doing. 

So I think it’s really important to have people you think are going to be there through a variety of market conditions. Someone asking for covenants shows they’re stressing their investment. They’re looking beyond the immediate period. 

Anybody can borrow money when conditions are good. But only certain people can borrow when conditions are adverse. And I think when agreeing your covenants, you should allot covenant headroom. The internal limits we apply to the business are nowhere near our financial covenants, and I think that’s the right way to be. It’s strange to be able to just go and borrow money without any covenant.

Fretwell, M&G: I would stress that the reason we could keep our market open in the downturn was because my bosses all knew we were doing something more sensible than just taking a blind punt on an uncovenanted asset. We can’t change the default rates, but we can change what happens when things start going wrong. 

Rothenberg, MetLife: That’s the key. Covenants give you a seat at the table alongside the banks, so you’re not waiting for other people to work something out, and then seeing what’s left. You’re there in the discussion and negotiation, defending your position as a senior unsecured creditor, pari passu to the banks. 

: M&G have done at least one Schuldschein, haven’t you?

Fretwell, M&G: Not a pure Schuldschein. It started off as a Schuldschein, but ultimately, the maturity went beyond 10 years. It was quite a big deal. The documentation looked startlingly like a Schuldschein, but it had all the standard USPP language. It was a hybrid. Even worse, it had a bit of a listing in there, as well. So it was a day I don’t want to relive, trying to close that. Creating hybrids is interesting, in a Confucian sense!

Zorzi, BNPP: I always say to my team that we are selling a credit. Most of the time, the format is irrelevant. We find investors, and then it’s a negotiation between the issuer and the investors. But the format, whether it’s a loan, or a bond — it’s not marginal, but it’s not the purpose of the sale.

Fretwell, M&G: No. And I think that talks about the sophistication of the investors now. Five years ago, you would have just got ‘is it a loan? Fine. Is it a… no, I can’t do that’.

Zorzi, BNPP: It’s a good point. At the start of the Euro PP market, a lot of investors said: ‘we want to know what your internal rating is. You have to give it us.’ And we said: ‘No.’ Because we felt that the internal rating system of a bank shouldn’t be a substitute for credit work done by the investors. That was a big discussion at the start, showing that, in my view, people were not ready. And this has stopped, because credit teams have developed. Now they can do the analysis. This was the sign that the market was going to be sustainable.

: Simone and Mark, do you give your investors all the same financial information you give your banks, and in the same way?

De Wit-Huijs, Rolls-Royce: Yes.

Kildea, Howard de Walden: Yes. 

Gutermann, Helaba: The internal credit rating is very useful for us, because we provide it to our associated savings banks, and it is a big chunk of that credit process. We don’t give it to external investors, though.

: Do the Schuldschein investors get bank-quality information on issuers?

Gutermann, Helaba: Absolutely. All the information for a deal is available to all, with the usual non-disclosure agreement that you need to click through to the information on the platform Debtdomain, which has become quite standard for the Schuldschein market. 

: Jason, you’re hungry for assets. Have you thought about going into the Schuldschein market?


Rothenberg, MetLife: No, not really. Mainly because of the covenant issue. The documentation is fairly lean, at least on the surface, though it does reference the civil code behind that. But there are various provisions that US investors would need. You can take that document and adapt it, and put together a hybrid. You can do that with an LMA doc, or a Euro PP, or an MTN. But the covenant issue is the main reason why we haven’t participated.

: A single debt to Ebitda covenant wouldn’t be enough for you?

Rothenberg, MetLife: It depends on the credit. Many implied investment grade Schuldschein issuers can tap that market without covenants. In the US PP market most implied triple-B issuers usually give at least a net debt to Ebitda test and an interest coverage test, as well. The key is aligning core financial covenants with the bank lenders.

Swap alchemy

: The ability of investors to do swaps themselves and offer issuers the currency they want has been a notably increasing feature in US PPs over the last three or four years. But in the last year we’ve had some pretty big moves in rates and currencies. Have you found any investors saying ‘we got burnt on this or that, and we’re out for now’?

Proudlove, ING: No. Not really.  It used to be the issuers that could do swaps, and the investors had no flexibility, but that has swung around. I don’t think the investors have quite as much flexibility as the issuers used to have, but it seems to be going that way. 

The investors know the risks, they try and mitigate them to the best of their ability. I don’t think people are putting them on blindly. 

At the same time, issuers are often moving to funding in their domestic currencies, because they are no longer as able to do cross-currency swaps. That’s fine, in Europe, the US, you’ve got deep markets, even in the UK. But where this is possibly going to cause a problem is for issuers in some of the smaller currency markets: the Nordics, Poland, the Czech Republic and places like that. They are trying to find the right balance between accessing the deeper dollar and euro capital markets, versus maintaining a more appropriate funding product to match their currency requirements.

Rothenberg, MetLife: Four years ago, probably 80% of what my team did was in dollars. Today, about 80% is in sterling or euros. That’s because more investors have been able to offer currencies, so more companies have come to our market, expecting to receive only sterling or euros, as opposed to having to take some dollars and swap it themselves.

Post-financial crisis, as companies became more reluctant to use their swap lines, and the costs went up, the US PP market adapted to provide more direct currency. 

Kildea, Howard de Walden: It’s not just the cost of swaps, it’s also the accounting. In our last couple of deals, the insurance company has done the swap, and passed us sterling. They’re still protected with a makewhole provision if we redeem early. So to me, it’s the same effect as doing a swap.

But it’s hard to do a 15 or 20 year swap nowadays. And if I did a swap with banks, in my accounts I would have to mark it to market. This way, I don’t. It’s still a contingent asset or liability, but from the accounting point of view it doesn’t create any noise. That’s a big attraction.

: Simone, is your engine business in dollars?

De Wit-Huijs, Rolls-Royce: Yes, the spare engine business is completely dollar-denominated. We keep our debt in dollars and our investors are dollar-based.

Kildea, Howard de Walden: The dynamics of the currency swap market mean there’s actually an advantage to an issuer of going through the swap markets. It comes out cheaper than issuing in sterling. That’s held for about four years. So I could have a UK institution that bids very competitively for a deal, but they may miss out, because it comes out 20bp lower from US investors through the swap market.

Merkofer, UniCredit: Isn’t that the main reason why the USPP picked up in 2016 for continental European issuers? The dollar-euro basis?

Rothenberg, MetLife: Yes. The negative euro-dollar basis swap has been very helpful, in terms of what pricing our market can offer European companies. But still, the market is slowing down in continental Europe, because banks have been so aggressive.

Gutermann, Helaba: We were only euro-based, previously. But we’ve found that there’s nothing stopping us from offering all kinds of other currencies. Dollars, sterling, and there’s a Czech koruna issue in the market right now. We’ve had enquiries about renminbi. Chinese investors are important in the market.

A lot of the new international investors like East Asian banks are more comfortable with dollars. So whenever the issuer is capable of issuing in dollars, or indifferent to it, we would always do a multi-currency issue.

Which way forward?

: What would be the best way for private debt markets in Europe to evolve?

Proudlove, ING: The main issue for the private debt market is this 80-20 predominance of bank lending versus capital markets in Europe. When we get a mindset to change that, we will see a big growth in the capital markets, which will spur on growth in private debt markets, as the next tier down of issuers come in.

But the big change will come only with the normalisation of monetary conditions in Europe, and who knows how long that will take?


Fretwell, M&G: Yes, Europe is overbanked, and it will come down to a change in policy when governments allow their banks to go bust. It’s been a very slow scaleback since the financial crisis. 

What is more achievable is a decent resolution for PPs in Solvency II. The treatment won’t be any worse than for public bonds, but we would argue strongly that it should be better.

In general, we lose less on a PP default than we would on a public bond. So why, under Solvency II, would you have the same capital weighting?

This will affect many insurance companies, but the largest ones will develop their own models. But hopefully, if the regulator says something nice, we might amend our models. ICMA are making the arguments, so we have our fingers crossed. 

Another way to get investors in is that we need some form of clearing house for anonymised data on deal performance. This is a private market. We talk about how wonderful it is, but it’s never provable. It’s generally word of mouth, but amongst people already in the market. So if you’re not in the market, you get no comfort.

: There have been some green Schuldscheine — do you see any role for green PPs?

Fretwell, M&G: At the moment there’s no mandate specifying that in the market. At M&G, we are setting up an impact fund, to invest in private bonds, maybe some public, that are doing something socially worthwhile.  

But the green bonds in the public market are priced more tightly than a similar public bond, so you have to have a special mandate to invest in green. It’s not going to dominate our market.

Merkofer, UniCredit: I also expect private debt markets to grow, once the market normalises. But I don’t believe we’ll see harmonisation. I think various products will co-exist, as now, and which ones will grow more is difficult to say. 

We’ve seen two or three green Schuldscheine and a couple of private placements, which had a kind of green label. The issuers probably got to diversify their investors a bit more, but we need to see more of these trades, to see if there is really a pricing advantage for the issuer. 

: Jason, the NAIC ratings in the USPP market are being revised, with small changes in the capital allocations required for different rating bands. Has that affected the market?

Rothenberg, MetLife: No. The NAIC only puts a designation on a deal after it’s closed, and then investors have the right to appeal. The more granular the NAIC becomes with its designations, the more appeals they’re likely to get.

Because while the capital charge difference between a BBB+ and a BBB may be relatively small, that difference in designation could imply a pricing difference for the issuer. And if that company comes back to our market, they’re going to want to make sure they have the correct NAIC designation. 

The NAIC will need to be prepared for that.

Coming back to what Richard said, for us, the biggest challenge over the last couple of years has been the decline in USPP issuance from continental Europe. And until liquidity thins out a bit, and we have normalisation there, it is likely to continue that way. We’re hoping it will change over the next couple of years.

De Wit-Huijs, Rolls-Royce: We’re very happy using the PP market, because of the tenor that’s available. What I would like to see is more European investors being able to do dollars for us. We already have quite a large investor base, but we’d be very happy to see a few more European investors in the dollar space.


Gutermann, Helaba: On green Schuldscheine, I think it’s here to stay. We’re seeing insurance companies create funds, specifically for that. I think the savings banks are mostly indifferent, but we shall see.

Otherwise, there is a lot more choice, for issuers and for investors. And the Schuldschein market is expanding. There is probably a limit to this expansion, before the product gets changed to something it isn’t supposed to be. And we are very mindful of that.

Kildea, Howard de Walden: I don’t know what constitutes a green deal, but on the corporate side, I think there’s a change. Corporate sustainability was focused on the management of natural resources and carbon emissions. It’s moving beyond that to more social impact. 

I’d really recommend you look at some of the work the Crown Estate have produced. They have lots of performance indicators that show they make a positive contribution to society, and they take it into account when they make investment decisions.

It’s a bit like giving money to charity, which is actually a bit lazy. It’s more interesting for us to think: ‘We’re a beneficiary of private medicine, in Harley Street. Should we be providing for people who can’t self-pay for medical care in Harley Street? Or be retraining nurses to go back into the NHS?’ So the more successful we are, as a business, there’s some public benefit.


Zorzi, BNPP: There’s a real purpose for the PP market, because there are a lot of smaller companies, private companies that simply don’t want to disclose publicly to the market. And now, because of the market’s capacity, this can be done, to access longer term funding.

On the green side, it’s more than green, it’s CSR. We were lucky enough to do the Nordex and FrieslandCampina green Schuldscheine, but in 2015, we did the first USPP for an Australian wind farm, the first renewable deal. Pricing is not everything for the issuers, it’s a way to communicate about their impact on the community to different investors. And investors will raise more and more funds for it. It’s here to stay.   

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