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US PP foreign policy working despite Schuldschein’s land grab

The US private placement market is the largest, most established private debt market in the world. It has huge international appeal, attracting issuers from around the globe who enjoy the ever evolving features the market offers and the fact that it seems to ride out any periods of weakness of other global markets. Nigel Owen reports.

The variety of geographies from which issuers come to access the US PP market continues to grow year on year, while the volumes of deals from the more established jurisdictions are maintained. Most participants do not see any reason for that to change.

“2017 was a typical year for the US private placement market,” says Geoffrey Schmidt, general manager, corporate finance, for North America at National Australia Bank in New York. “US issuers represented 59% of total issuance, hence cross-border issuers represented 41%.

“In 2018, the cross-border segment has outperformed. US issuer volume has dropped to 43%, i.e. cross-border is now 57%. This is a function of increased UK issuance due to a larger deal for Thames Water, and perhaps some issuers getting in before Brexit occurs.”

UK companies make up the largest proportion of cross-border issuers by country, and continue to grow their issuance volume by year. Other countries’ volumes vary (of these, the Netherlands, Ireland, Australian and New Zealand tend to dominate), but combined and supported by a number of issuers from new jurisdictions, the cross-border volumes keep growing

“The use of the market varies by country,” says Ed Barker, vice president at Pricoa Capital Group in London. “The UK is totally established for issuers issuing US PPs and 2017 was another big year for UK issuers.”

The UK education sector was responsible for a number of US PP issues in 2017 as the market is continuing to become a mainstream market for UK borrowers.

“Companies have realised that the US PP market has more liquidity than the UK public market,” says Barker. “There are more buyers of size in the US PP market than in the UK loan market.”

“Europe is a slightly different beast,” he adds. “There has been a slower acceptance of US PP product. Whether that’s a documentation issue, a legal element, or rival domestic markets such as Schuldschein in Germany, it is difficult to say why European issuers have not gone to the market in as such a big way as UK issuers.

“The Netherlands has some occasional issuance, but last year wasn’t a huge year. The same in Ireland. France is even more lumpy than that, and the rest of Europe has probably not taken the US PP market as a mainstream market yet.”

Barker also says that his firm is putting money to work in new territories — Latin America has been a big focus recently. It is this capability of the US PP market that attracts both investors and issuers. There are no structural hurdles for cross-border issuers to overcome. Issuers from any geography that want to access the US PP market just need to prove their quality, and this is the reason the level of issuance is seen as continuing to increase.

“From an investor perspective, the main benefit is access to issuers you wouldn’t have access to in other markets,” says Barker. “Some have public issuance, but most slightly smaller companies that choose to do US PPs instead wouldn’t otherwise have access to those investors.”

Strategic access

Siobhán Duffy, head of private placements at NatWest Markets in London, explains that pricing for European issuers has played its part in issuers from the region not using the US PP market, but that both can be used strategically.

“We’ve taken transactions from Germany and France, but they are still few and far between. In part, the challenge has been that QE has made euro markets very competitive. However, there have always been big European issuers that have used the US PP market strategically — when there has been lack of access to the euro market or a pricing arbitrage. We have seen strong markets in Europe, but we are starting to see a reversal of pricing advantages as QE starts to slow. That will offer opportunities.”

Duffy, however, also feels that the complementary nature of the maturities available in the US PP market is also an important factor in issuers’ plans. In December 2017, German motorway services operator Tank & Rast sold a pair of €300m public bonds with seven and 10 year maturities. Before that, however, the Baa3/BBB- rated company had sold €507m of US PPs, comprising a €225m 15 year bond and a €282m 19 year bond. A company with that rating would not have been able to raise such long dated tenors in the euro public market.

Aquasure, the company that runs the state desalination plant in Victoria, Australia, issued US PPs in 2013 and 2015. Matthew Onley, chief financial officer, says the three main factors that led to the decision to access the US PP market for funding were the tenors available, the flexibility and the demand.

“The domestic debt markets in Australia is generally a three to five year market, with some seven year issuance. Whereas the US PP markets offers those tenors but, more importantly from our perspective, also the ability to go longer. The only restriction going longer than 15 years is the ability to swap it back to Aussie dollars at the right price.” 

“We have had Aussie dollars as part of deals, in addition to US dollar funding,” adds Onley. “Whilst we don’t have a real preference, the fact we don’t have to put in place cross-currency swaps makes the process a bit simpler on our side. That is the one change in the market we have seen in the last few years. When we did our first deal there were only a few investors who could place Aussie dollar funding. Now we’re seeing many more have that ability to place funds in currencies other than US dollars.”

The other characteristic the US PP market gives to issuers is the option to delay settlement. It is generally accepted that an issuer can delay the settlement of the deal for up to three months at no cost. Longer delays are possible, but issuers start to have to pay for the benefit beyond that. This effectively provides more time for an issuer to close out the deal and lock in pricing, even though the funds may not be required immediately. 

Growing deal sizes

Onley continually monitors opportunities in the US PP market and believes that there is still plenty of capacity left for his company. “There was a common conception that you could cap out somewhere between $1.5bn and $2.5bn. But now we’re seeing some much larger transactions.”

Aquasure’s compatriot Transgrid, the power generation business in New South Wales, sold the largest debut deal by a non-US issuer when it sold $750m equivalent across four tranches in 2016. It then returned to the market to issue a similar volume in 2017.

Schmidt agrees that the larger ticket sizes are a key factor in the success of the US PP market. “Larger issuance volumes, longer foreign currency tenors and bigger bid sizes are the attractions. One transaction that NAB led recently, for example, had a $300m bid from a single investor.”

Not only is the investor base able to absorb larger issuance, Onley likes the stability he gets from investors. “The investor base is stable, and the representatives from those investors are also quite stable. You get the opportunity to develop a relationship with those investors.”

Duffy says this is not an unusual experience. “Issuers who like the US PP market tend to love it,” she says. “Because they feel there is an engagement with the investor base. MiFID reduces an issuer’s ability to communicate with public bond investors. A private placement enables them to still engage with investors. As such, they like the fact they know investors, are consistent and can they get a chance to get feedback on how investors feel about their name.”

Duffy is quick to point out, however, that the US PP market should not be seen as a way round these regulations. “We have had to navigate through MiFID, MAR etc, but most requirements, whether they apply to the US PP market or not, are all good practice. So they should be things we should adopting as good corporate citizens in these markets.”

Investors are also accepting of the direction of regulation, but are similarly unworried by it. “Regulation is only going one way,” says Barker. “Regulation always makes the job of investing a little more complicated and time-intensive, but investors are big operations with big back offices to deal with that.”

More global alignment of regulation may prove to be yet another factor which proves to increase volumes. 

“There is lots of talk in Europe around the ability to rationalise the PP market for the European investor base,” says Duffy. “But those large European investors are saying the US PP market is fast becoming a global market, and European issuers are pleased to see European investors taking part.” 

Barker also doesn’t see Brexit having much impact on the market. “It may have an impact on some institutions, particularly for investing in the UK or for either US or UK investors investing in Ireland or the Netherlands. Maybe they will need some location in Europe. That may make it slightly harder, but even then, it doesn’t feel like to us or our peers that there is any regulation on the horizon that will make a material difference to investors’ appetite.”

The success story of the cross-border US private placement market looks set to continue for the foreseeable future, with all sides of the market in bullish mood. 

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