“The aspiration is to create a pan-European private placement market to match that of the US,” was how Allen & Overy began its survey of the European alternative finance market in November 2015. “The desire and ambition to make this happen is clearly there for both corporates and investors.”
Eighteen months on, the enthusiasm of market participants to do so is undimmed — but that evolution has not worked out quite how some of the product’s promoters expected.
The launch in France in 2012 of a new Euro private placement market, supported by all the leading French banks, several of the largest insurance companies and asset managers, and a diverse collection of corporate issuers, has succeeded.
There is a new nucleus of private placement activity in Europe, for which new template documents have been prepared and around which a market ecosystem has developed.
But issuance volume has not snowballed the way market participants hoped.
Statistics are hard to come by as the market is private and there are no precise definitions — the Euro PP shades at its edges into other products. But bankers involved talk about roughly €5bn of issuance in 2016 — not the €10bn-€15bn some had expected would be flowing from France alone in the market’s fifth year.
Standard & Poor’s, using different calculation methods, totted up €14bn of private debt issuance in Europe in 2015.
Dealogic, which recieves deal information from investment banks, could only count €3.9bn in 2016, down from €7.3bn in 2015 and flat to 2014’s level.
Meanwhile, as the US National Association of Insurance Commissioners noted in a recent update, after a record year in 2015, when volume reached $61bn, issuance in the USPP market rose to $65bn in 2016.
Europe matching that number is still a way off — and the US market is not going to stand still. US investors absorbed more large deals of more than $500m in 2016 (22 of them, according to the NAIC), and are hungry for more.
A good chunk of that USPP volume comes from Europe — about $10bn from the UK and a smaller share, recently, from continental Europe, though in the past it matched UK issuance.
Complementary products
Those who have been closely involved with the evolution of private placements in Europe say, however, that it is misleading to regard the European market — referred to by the International Capital Market Association (ICMA) as European corporate debt private placements or ECPP — just as a competitor to the US version.
“We believe ECPP and USPP are two different alternatives in the corporate funding toolbox,” says Ben Fox, a partner at Allen & Overy in Amsterdam, who has helped to develop documentation supporting the growth of the market in the past five years.
It’s not just the USPP that continues to be a formidable competitor for the relatively youthful ECPP market. The European private debt market is itself fragmented. German corporate borrowers continue to regard unlisted Schuldscheine as the market of choice in which to raise cheap and plentiful funding at flexible terms. Schuldschein issuance climbed from about €20bn in 2015 to €26bn in 2016.
As with the USPP market, some dispute the notion that the Schuldschein market should be seen as a competitor to ECPP.
“A number of initiatives have been taken recently to build bridges between the Schuldschein and Euro PP markets, such as the exchange of ideas by ICMA on best practices between the two markets, which is obviously positive,” says Fabien Calixte, director of mid-cap origination at BNP Paribas in Paris. “But as it is a loan market in which most of the investors are banks, Schuldscheine are still quite different from ECPP in terms of demand, format, process and execution. The two markets are also different in terms of pricing, maturity and return expectations. So I strongly believe there will continue to be two separate private debt markets in Europe.”
Guy Silvestre, co-head of global capital markets at Société Générale in Paris, agrees that the Schuldschein and ECPP should be regarded as two very different markets. “The Schuldschein market is clearly more liquid and can offer more attractive pricing than ECPP,” he says.
“But it is not a suitable tool for borrowers looking to diversify their funding sources away from the bank market.”
New investors move in
On the contrary, he argues that institutional support for the ECPP market is becoming stronger and more diverse. “Every month we’re seeing investors creating new funds dedicated to private debt, and as Solvency II is clearly supportive of the private debt market, we are also seeing a rise in demand from insurance companies,” he says.
This is supporting the development of a heterogeneous groundswell of demand which is very different from that in the Schuldschein market. According to the most recent Allen & Overy survey, “the investor base is becoming broader and deeper, with private equity groups, specialist credit managers, business growth funds, angel investors and even SME-focused online invoice trading platforms channelling capital to hungry borrowers.”
Allen & Overy is describing a wider range of private and alternative financing than the bank-arranged, institutional investor-targeted Euro PP market. But the direction of travel is the same.
And although it may be a younger source of demand, it would be a mistake to regard the European PP investor base as less sophisticated and demanding than the heavyweight insurers that anchor demand in the US.
“There was a misconception as the ECPP market was growing that if you were a Dutch borrower, for example, you could rely on a friendly pension fund down the road to provide private debt without asking too many difficult questions,” says Fox. “But European investors, many of which are also now active in the US market, will look after their interests as fiercely as those in the US.”
Marc-Etienne Sébire, partner and head of capital markets at the French law firm CMS Bureau Francis Lefebvre, agrees. “I wouldn’t describe Euro PP investors as intrusive,” he says. “They do ask a lot of questions, but that’s because they are long term buy and hold investors who must have a very good understanding of a company’s business. In that respect, they are similar to investors in the USPP market.”
A work in progress
It is perhaps harsh to draw comparisons between the ECPP market and other private debt markets. After all, while Germany’s Schuldschein traces its origins to the 19th century, the ECPP is still what Sébire describes as a work in progress.
He was one of the authors of the Pan-European Corporate Private Placement Market Guide, released by the ECPP Joint Committee and co-ordinated by ICMA, the publication of which was an important milestone for the European private debt market.
This guide, which evolved from the Charter for Euro Private Placements published by French market participants in March 2014, was updated in October 2016 with an improved version, which also covers aspects of the Schuldschein market, which it regards as part of the wider ECPP universe.
“Agreement on common market standards and best practices is essential for the development of [the] market,” the guide begins.
While Sébire recognises that Europe still has a long way to go in developing its private debt market, he is greatly encouraged by the progress so far. “If you look at the example of France, we very quickly went from zero issuance in 2011 to annual volumes of €4bn,” he says. “A few years ago, away from the biggest blue chips, most corporate financing came exclusively from banks. These days, I seldom come across a mid-cap company refinancing in France where the borrowers will only consider bank financing.”
France may be an exception. Private placement bankers say France continues to be the primary source of ECPPs, accounting for 30% to 40% of new issuance. Others put the French share as high as 70%. In part, at least, this may reflect new rules introduced in 2015, allowing insurance companies to invest 5% of their assets in alternative finance.
French deals plateau
In France, issuance volumes appear to be plateauing or even declining, which bankers say is largely caused by the high demand in the bank market. Laurence Mouratille, managing director, origination, at Société Générale in Paris, says there were 68 disclosed Euro PP deals from French borrowers in 2016, raising €3.3bn, compared with 72 deals worth more than €4bn the previous year.
Modest declines in French issuance are being compensated for by rising supply from elsewhere in Europe. “I think most mid-cap companies in Europe are now convinced about the need to diversify their funding sources,” says Calixte at BNP Paribas. “In terms of the number of ECPP deals we’re doing each year, we probably now see more representation from Belgium, the Netherlands and Italy than we do from France.”
This is corroborated by the latest Allen & Overy survey on the ECPP market. This notes that although German companies are “overwhelmingly likely to raise alternative funding at home”, Italian and Benelux issuers are becoming “more adventurous” in exploring a wider range of financing sources.
As A&O says, this suggests a single market will emerge, but that it may take time.
Besides attracting an increasingly diverse range of European borrowers, the Euro PP market is also starting to accommodate issuers from beyond the region in currencies other than euros.
In January 2016, for example, Puma Energy, the midstream and downstream oil company owned by Trafigura, the oil trader now based in Singapore, and Angolan oil group Sonangol, sold the first Euro PP in dollars.
The $100m seven year issue was bought by Delta Lloyd Asset Management.
Globalisation and adaptability
At A&O in Amsterdam, Fox believes there will continue to be a symbiotic rather than a competitive relationship between the private debt markets in Europe and the US.
The parallel growth of the two markets, he explains, has been beneficial for the USPP sector because it has encouraged the introduction of more mechanisms to accommodate European issuers. “The US is now offering a degree of optionality which hasn’t historically been available to borrowers,” he says. “For example, funding is now available in currencies such as sterling and euros without the requirement for a swap to be put in place.”
Others agree that a notable recent trend in the globalisation of the private debt market has been the documentation of US private placements under European law. “We recently acted for a US institutional investor on a €50m USPP governed by French law for Compagnie des Alpes,” says Sébire, referring to the French ski resorts group. “As part of the same refinancing exercise, the company also issued a Euro PP placed under French law with a European investor. Although the documentation of the two deals was different, the economic terms and covenants were aligned.”
The adaptability of the ECPP, says Fox, has been a distinguishing feature of the market throughout its organic evolution. “US practitioners often say that the European market is less flexible than the US, which I don’t believe is true,” he says. “A strength of the ECPP market has been that it began from a blank sheet of paper, which is just about as flexible and adaptable as it is possible to be.”
No elephants in the room
One of the main reasons why the Euro PP or ECPP market has not swelled as much in volume as proponents had hoped is that it has not attracted many big deals.
One of the earliest transactions, in late 2012, was a €500m issue for Lactalis of France, the world’s largest dairy company. Société Générale led the transaction, designed to refinance some of the bank debt Lactalis had used to buy Parmalat the previous year.
But Lactalis is unusual, and had a special reason for using a Euro PP. “Last year we arranged another €240m deal for Lactalis, which is a large corporate and could access the public market if it chose to do so,” he says. “However, it prefers the confidential nature of the Euro PP market, where it is happy to disclose basic deal information but does not want to release more detailed terms [to the public].”
Companies wanting large sums are spoilt for choice, between the USPP market, Schuldschein and public bond markets, at least one of which has usually offered larger issuers better terms than a Euro PP.
Given the illiquidity of the private placement market, bankers say it is entirely reasonable that borrowers should pay a premium over the levels they would pay in the public market. For the time being, excess liquidity in the bank market means they are also likely to pay a premium to the bank-heavy Schuldschein market, which Silvestre says is typically at least 50bp cheaper than an ECPP for borrowers eligible for both markets.
Investors stretch longer
The maturities available in the European market are another factor that has held back the growth of ECPPs. “Although in some very specific circumstances we have seen deals with 10 year maturities, in the vast majority of cases maturities in the ECPP market used to concentrate in the five to seven year maturity range,” says Sébire. “However, things seem to be changing for borrowers with the best credit profiles.”
Mouratille is confident that maturities will lengthen as investor demand grows in the ECPP market. “Investors are looking for ways to differentiate themselves from the bank market, where excess liquidity is leading to a rise in the provision of five and six year bullets,” she says. “Some investors are already responding by offering to buy private debt with maturities of 10 years. This may help to accelerate growth at the longer end of the Euro PP market.”
For now, however, the biggest constraint to growth across the curve in the ECPP is a shortage of issuance. “There is still a clear imbalance between supply and demand in the ECPP market,” says Calixte.
Bankers believe that as the market expands and maturities lengthen, the proceeds of European private debt will be put to an increasingly wide range of purposes, such as infrastructure funding.
“We have already seen a number of project deals in the UK, and some issuers are also looking at the potential of real estate and aircraft financing via Euro PP,” says Calixte. “My view is that there is great potential in these areas because of the opportunities that will arise for borrowers to meet investors’ requirements in terms of longer maturities, fixed coupons and enhanced returns.”