Pan-European private placements
January 20 2015
Philip Smith (Allen & Overy)
Jonathan Edwards (HM Treasury)
Angus Whelchel (Barclays)
Calum Macphail (M&G Investments)
Katie Kelly (ICMA)
Marte Borhaug (CBI)
Report - The Pan-European Corporate Private Placement Market Guide (ICMA)
Report - Funding European business: What's the alternative? (Allen & Overy)
Report - Boosting Finance Options for Business (Industry-led Working Group on Alternative Debt Markets)
Since the regulatory crackdown that followed the 2007-08 financial crisis, banks have been less keen on lending to European companies. Meanwhile, others, including insurers and pension funds, have stepped into the breach, particularly for businesses without access to the capital markets.
The focus of activity in this area at this round-table was the Pan-European Private Placement Working Group, set up by ICMA, AFME, IMA (now the Investment Association), TheCityUK and others, including Allen & Overy, which published a report entitled “Funding European Business: what’s the alternative?” in November last year.
It soon became clear, at the round-table, that the companies that might benefit from private placements are somewhat bigger than those covered in the CSFI report, Seeds of Change (Andy Davis, July 2012) and at our round-tables on crowdfunding, P2P lending etc. Private placements involve mainstream investors, often with banks as intermediaries. It is, however, another arrow in the quiver of non-bank sources of finance, covered in the 2012 Breedon report, and financial market participants, industry representatives and at least some politicians are keen.
The PEPP working group is looking at the market positioning of these placements, tax issues (e.g. exemption from withholding tax), the impact of Solvency 2 (surprisingly benign) and documentation. We can look forward to the publication of a guide to best practice soon.
For companies, PPs are deemed to be a good thing because they diversify sources of finance, reducing reliance on banks. While this market is aimed at those that are not listed on stock markets and do not issue corporate bonds, the size of loans (or loan-note issues) would be £10m upwards. The companies do not need a credit rating and the borrowing duration is typically 5-12 years. While the debt can be transferred (with difficulty), it is designed for buy-and-hold investment. This is, indeed, “patient” capital.
The Allen & Overy report was based on interviews with treasurers/finance directors at more than 200 European companies with more than 50 employees. It found that “alternative” sources of finance have almost caught up with bank sources in supplying more than 40% of lending, with capital markets at 16%.
However, definitions are fuzzy and, in any case, the PP market remains small. Even in its most developed incarnation, in the US, issuance only amounts to about $50bn a year. Interestingly, UK companies are active in the US market – indicating a lack of opportunity for sterling or euro issues, despite the rising cost of currency and interest rate hedges.
For institutional investors, who have access to private information about the business, the attraction of loans to unlisted companies with no credit rating include:
- diversification from the limited pool of companies raising funds on public markets;
- greater investor protection because of senior lender status and covenants that trigger timely action if creditworthiness deteriorates;
- a higher yield thanks to the illiquidity premium.
Yet default rates are quite high e.g. 20-25% on one of Germany’s markets catering for Mittelstand companies. Lead investors, with expertise in credit analysis and managing negotiations with borrowers, tend to have a seat at the table with banks in the event of default.
This raises a question about resources at the investment institution, which would need a team of people dedicated to this type of business. And once it gets that serious, the bigger the deal, the better.
The hope is that institutions will learn through larger deals, riding on the coat-tails of the seasoned participants, and that their risk appetite and skill-set will then trickle down to the smaller fry. In the French market, which has grown rapidly in the past few years, about 70 issuers have borrowed on average €100m each. More recently that average has come down to €60m.
The Association of Corporate Treasurers, which did a post-Breedon report on this market, found many barriers, most of which have since been tackled. One that the UK government is looking at raising is the £300m cap on the exemption from withholding tax.
Euro-pp has a somewhat frivolous ring to it – which is why (I assume) the preferred term these days is the pan-European private placement market. But, whatever you call it, there seems to be no doubt that, since the regulatory crackdown which followed the 2007-08 financial crisis, banks have been less and less keen on lending to European corporates – and, equally, that others are stepping into the breach. For bigger corporates (particularly in the UK), access to listed debt and equity markets may well be the preferred route. But for smaller firms – and for many mid-market companies in Continental Europe, for whom bank debt was their first (and often only) recourse – there is a range of alternative sources of finance that is well worth looking at.
The principal focus of activity in this area today is the Pan-European Private Placement Working Group, set up by ICMA, AFME, IMA, TheCityUK and a number of major players – including Allen & Overy, which produced an important report into alternative finance in November last year. We, too, have looked at alternative finance for SMEs, with Andy Davis’s report (Seeds of Change, July 2012) and with round-tables on crowdfunding, P2P lending etc. But this is bigger stuff. It involves mainstream investors, hedge funds, pension funds, asset managers – and the whole ‘shadow banking’ sector more generally. There is a sense that we are at a tipping point, in which banks are voluntarily ceding a major part of their traditional business to various forms of non-bank financial institution – with profoundly uncertain consequences.
So, it is worth looking at – and we are delighted to have been able to put together a distinguished panel to do just that:
- Katie Kelly is a Director of Market Practice & Regulatory Policy at ICMA where she is currently working on certain growth-related projects, including co-leading the ICMA Pan-European Private Placement Working Group. She joined ICMA from Linklaters.
- Philip Smith is a partner at Allen & Overy who advises on international debt capital markets transactions (covering investment grade and non-investment grade issues in the public and private markets). He oversaw A&O’s recent survey and report: “Funding European business: What’s the alternative?”.
- Marte Borhaug is head of financial services and corporate governance at the CBI (and was until recently based in the Brussels office). She is currently working on the CBI’s ‘Financing for Growth’ campaign, looking at ways of improving both SME access to alternative finance and the provision of patient capital.
- Calum Macphail is head of private placements at M&G Investments (a role that he has held for well over a decade). He joined M&G from the credit department at Dresdner Kleinwort Benson, and before that worked as a supervisory analyst at the Bank of England.
- Angus Whelchel is global co-head of the Private Capital Markets team at Barclays. He has spent over 18 years in the private placement market and is responsible for the origination, structuring and distribution of primary private offerings for large and small multi-national public and private companies across all industries.
- Jonathan Edwards is head of equity and debt capital markets at HM Treasury, advising UK ministers on domestic and European capital markets policy. He represents HM Treasury on the ICMA working group on private placements.