30 years: Debt capital markets
Tim delves deeper into the private placements, including their issuance process and the recently-evolving European market.
Tim delves deeper into the private placements, including their issuance process and the recently-evolving European market.
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13 mins 16 secs
Private placements act as a hybrid between a public bond and a syndicated loan. They are not regulated by the SEC and public disclosures are not required. Life insurance companies are attracted to US Private Placements, or USPPs, due to their covenant protection and portfolio diversification potential. European institutional investors have gravitated towards the European private placements market for similar reasons.
Key learning objectives:
Understand the process of a private placement
Understand why certain companies like USPPs
Describe the European private placement market
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US private placements provide incremental yield (estimated to be 15bps-50bps) compared to public bond issues with similar profiles, and they provide better covenant protection. They also improve portfolio diversification, both from a sector and geographic perspective. Of course, insurance companies and other institutional investors which want to participate in the US private placement market must have the requisite infrastructure to originate, evaluate and monitor transactions in their portfolio. This means resources to:
In general, they favour companies with “real” assets, predictable cash flows, limited risk of disruption, and strong management teams.
A private placement transaction is “born” when a company decides it wishes to obtain long term financing and does not wish to borrow from banks and does not view the public bond market as a viable alternative. Normally, the company will approach its relationship banks that have US private placement agent teams, in order to select one or more of these banks to act as a placement agent. The process for issuing a US private placement normally takes 10-12 weeks.
European institutional investors, including insurance companies, asset managers and pension funds, have traditionally focused only on public bonds that are rated. However, after the 2008 financial crisis, continental European companies and investors – initially confined principally to France – began to look at the credit-intensive private placement market for smaller, un-rated companies. French companies, many of which were private middle market companies unable to issue in the public bond market, were looking for ways to diversify their funding away from volatile banks, and to raise longer-term Euro-denominated funding. From this start in France only a few years ago, the European private placement market has grown, becoming broader in its investor and issuer reach. In 2017, the volume of Euro private placements was around €7 billion.
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