The US private placement market has carved itself quite a following among borrowers in the UK and Europe, with its enticing offer of long dated debt at tight margins. But since Britain voted to leave the European Union, agents are playing on another of the market’s strengths — its resilience to external shocks. Silas Brown investigates.
The Schuldschein market isn’t the only market breaking records for European private debt.
In the US private placement market, UK issuers made up more than a fifth of borrowing last year, with roughly $15.1bn of issuance, according to Barclays data. Some claim that was its highest proportion ever.
“US PP investors from Canada and the US are growing more and more accustomed to analysing UK and European borrowers, and see them as an important source of diversification away from North America,” says an investor at a US institution.
Last year’s UK volume was bolstered by a clutch of large transactions, bought by investors in Canada, the US and the UK.
Thames Water was one of the borrowers, when it priced the largest UK private placement of the first quarter of 2018. It was a dual currency transaction, $340m and £346m, sold to investors based in the US, said a US PP banker.
Brookfield Utilities and Scotia Gas Networks also raised £300m each last year, according to a US PP investor, while Northern Gas Networks sold £200m of 10 and 12 year notes in October.
“It’s clear that PP investors are not shying away from UK issuers, even with the uncertainty around Brexit. This is a good sign for other UK issuers thinking of accessing the market in 2019 and beyond,” says a UK private debt agent in London. “The PP investors are interested in long term credit analysis and don’t have to mark to market, so short term volatility really doesn’t affect them.”
A PP investor in London says: “Brexit has had a direct impact only for a very few sectors and companies. For most of our clients and most industries, the impact is minimal… There are some companies which have genuine trading exposure and supply chain risk, and less sophisticated hedging, but we haven’t seen any real impact. Some companies that were going to underperform have been using it as an excuse.”
Bullish despite Brexit
This bullish confidence in UK credits was on particularly clear display when Tritax Big Box, the London-listed industrial real estate investment trust, raised £400m of 10 and 12 year US private placement notes last November.
Agents NatWest Markets and Santander priced the deal on the day that the then Brexit secretary Dominic Raab and work and pensions secretary Esther McVey resigned from the government, due to their inability to support then prime minister Theresa May's proposed exit agreement with the EU.
A US PP investor, who participated in the transaction, described the situation at the time. “We were looking at the headlines: two cabinet ministers went in quick succession. I was reporting back to my boss on the deal, saying things would be OK — then we priced the transaction and the next day everyone moved on.”
Tritax’s £250m February 2028 notes had a fixed coupon of 2.86%, while the £150m February 2030 notes were sold at 2.98%. According to one agent, those were the same coupons it would have obtained two weeks earlier.
In contrast, in the public bond market, TSB Bank was forced to pull a prospective covered bond issue that day, while Volkswagen had to pay elevated new issue concessions to access the sterling bond market.
US PP participants are expecting further sterling dealflow, as a consequence of Brexit volatility disrupting public bond markets.
One US PP investor, who takes particular pride in the stability and steadfastness of his market, says: “Look at 2008 — when public markets shut, the US PP market stayed open.”
In times of market turmoil, PPs are often the most stress-free way to raise debt. Investors do not mark securities to market, so are not preoccupied by volatile credit spreads.
The rationale of a US PP investor was explained by one practitioner like this: “If you are a good credit before market problems, you’ll likely be a good credit after, too.”
Specialists are confident many issuers will get a good hearing in the PP market, despite the serious threat of a breakdown in Brexit talks.
Cadent Gas, G4S, Rolls-Royce, SSP and Wood Group are among a host of UK issuers that have issued sterling US private placements this year, without having had to pay new issue premiums.
“If you are a regular corporate issuer in both public and private markets and you’re looking for debt, US PP investors will take a less dramatic position about the risk around Brexit — so you’d go with private because we’re more stable,” says a second US PP investor. “We’re strong and stable — I’ve heard that phrase before.”