US Private Placement I

What is a private placement?

The term “private placement” is used frequently in the capital markets and can mean different things in different situations. The US private placement, or USPP, market mainly involves large US and a handful of UK insurance companies as investors, and a combination of US middle-market companies, private companies and larger foreign companies as issuers. In its most rudimentary form, a US private placement might best be described as a hybrid between a public bond issue and a syndicated loan.

A US private placement refers to the issuance of a bond, or series of bonds, in a confidential - or private - transaction to a small group of well-established US private placement investors, comprised mainly of US insurance companies. The finer points of the transaction and the pricing are essentially negotiated between the borrower and the investors, so the structure and terms are unique for each USPP transaction.  Nearly all US private placements are implied - or actually rated - investment-grade, meaning Baa3/BBB- or better. They are sold under a SEC exemption known as 4(a)(2) of the Securities Act of 1933, meaning that they can only be marketed to and placed with accredited investors. The disclosure document for marketing a US private placement is normally referred to as a “private placement memorandum”, or PPM, which is very similar to a syndicated loan memorandum.

What is a USPP not?

A US private placement is not a drawdown under a medium term note  - or MTN - programme.  A drawdown under an MTN programme (or an EMTN programme as they’re known in Europe) is when a company issues a bond to a single institutional investor in a transaction that is structured and placed without being marketed broadly to investors.

A US private placement is not a 144A transaction.  The SEC 144A exemption is essentially a “safe harbour” that allows companies to access the US institutional investor base without complying to fairly rigid SEC requirements for public bond issues, so long as the issue is only marketed to qualified institutional buyers, or QIB’s.

What is the appeal to investors?

US private placement investors are willing to trade the lack of liquidity of US private placements (since there is a very limited secondary market) for:

• A combination of slightly higher yields
• Better lender protection (in the form of covenants)
• Improved portfolio diversification

Many global companies use the US private placement market as a key funding avenue because they can raise money in smaller (sub-benchmark) sizes in this market.  Also, USPP’s do not require public ratings, they can be arranged without the more intrusive and extensive initial and on-going disclosure that public bonds would otherwise require, and they can be marketed quietly and confidentially to only a small group of sophisticated investors.