Euro PP awaits end of QE but pan-European hopes fade

For a market only six years old, the Euro private placement has had quite a tumultuous life. Born in 2012 amid high hopes of building a European market to rival the old-established US private placement market, the Euro PP quickly achieved success and strong institutional backing in its home market, France.

But issuance growth then petered out, amid the weird financial conditions of Europe’s long recovery from the financial and sovereign debt crises. The market has grown, both within and outside France — but not as much as participants had hoped.

Now, as the European Central Bank takes its foot off the financial accelerator, the market may have more room to breathe. 

But at the same time, there has been a subtle change. Participants who maintained that, little by little, Euro PPs would expand into a pan-European market have largely given up on those claims. Instead, they say the Euro PP concept will spread across Europe, but perhaps in the form of multiple local markets with their own characteristics.

For the France-based Euro PP market, last year ended better than it began.

Larger borrowers had shunned the market for a few years. But in the last two months of 2017, four of them — Financière Agache, FFP, Mercialys and Orpea — issued larger-than-average Euro PPs.

“Treasurers began to realise that rates will rise soon, as the ECB withdraws from the public markets, and so companies were looking to lock in funding now,” says a Euro PP banker.

The ECB is widely expected to choose September to make another reduction in its quantitative easing policy of buying public sector, covered and corporate bonds.

Just how QE and other very expansionary monetary policy measures have affected private debt markets in Europe is a matter of some debate. But there is certainly a view that by depressing yields and encouraging banks to lend, they have made it harder for institutions offering private debt funding to compete.

Euro PP issuance wilted in 2017 to as little as €4bn-€5bn, from a high of nearly €9bn in 2016.

So there was relief in the market in November, when Mercialys, the shopping centre owner 40% owned by Casino, placed €150m of 2% 2027 notes.

FFP, the Paris-listed holding company 79.5% owned by the Peugeot family, then tapped its 2025 Euro PP for €57.5m, and issued €10m of new 2.6% 2026 and €20m of new 3% 2027 notes. 

Orpea, the listed nursing homes company that was an early Euro PP issuer and has also issued Schuldscheine, sold €63m of 2.2% 2024 Euro PP notes in mid-December. Financière Agache, a holding company owned by Groupe Arnault that holds indirect stakes in Christian Dior and LVMH, closed the year by tapping an existing deal expiring in 2022 for €70m, paying a coupon of 1.204%.

“They’re still paying coupons that are higher than what they find in public markets, or even the Schuldschein, but I think they’re beginning to realise that that reality might end soon, as the ECB winds up its purchasing programme,” says the banker.

It is too early to say whether the exit from QE and eventual tightening of monetary policy will lead to a flourishing of private debt. But Euro PP investors certainly feel QE has made life particularly tough for them.

“Our clients were in an unprecedented, challenging environment, from unconventional policies of the ECB having a number of adverse consequences across asset classes,” says Thierry Vallière, global head of private debt at Amundi in Paris.

Institutional investors expect to be paid an illiquidity premium for holding Euro PP notes. That premium was particularly visible in a climate where euro public bond yields were stick-thin — and where central banks were pumping money into banks through measures such as the targeted longer term refinancing operation (TLTRO).

But when the season changes and rates begin to rise, the case may strengthen for companies to diversify their funding away from banks and bond markets.

“Our pitch of a smaller number of investors with larger ticket sizes, that can offer longer tenors, would be that much more attractive if there wasn’t such a difference in yield,” says another institutional investor in Paris.

Corporate treasurers appear to be getting the message. Les Cinémas Gaumont Pathé, a subsidiary of Pathé Group, issued its first Euro PP in March, at quite a large size for the market. After holding meetings with investors from February, it placed €120m of seven year notes with a closed group of seven investors via BNP Paribas.

In late January, French casino and hotel operator Groupe Lucien Barrière had issued €90m of six and seven year Euro PP notes to a group of five investors, arranged by BNP Paribas. Holiday village firm Pierre & Vacances issued €76m of 3.9% February 2025 Euro PP notes via BNP Paribas, Crédit Agricole and Natixis.

“2016 was the year for Schuldschein issuance, with the likes of Plastic Omnium and Groupe SEB, and 2017 was the year for unrated bonds,” says Fabien Calixte, European head of BNP Paribas’s unrated credit platform in Paris. “So far this year, there is a question mark.” 

The Euro PP market has a chance to tempt larger issuers away from other funding sources. This is good news, as funding opportunities are beginning to emerge elsewhere for the smaller companies that have kept Euro PPs going in recent years.

The Euro PP market is facing a growing challenge for business from crowdfunding and technology platforms offering quick, low cost loans.

Online lenders like Lendix and Nivaura aim to speed up the process of raising debt for small and medium-sized companies, while cutting arranging and legal fees too.

“This could seriously affect deal numbers in the Euro PP market as, in a sense, it makes sense for smaller companies to use these platforms,” says a Euro PP banker.

That would include issuers like property companies Bird AM and Capelli, which sold Euro PPs in 2017 for €7.75m and €22m, paying coupons of 6% and 6.25%.

“Advisory fees and arrangership costs are pretty much comparable for a €15m deal as for a €500m deal,” says Phil Smith, debt capital markets partner at Allen & Overy in London. “Furthermore, often there is even more of a time lag.”

But losing such deals might not be the end of the world for institutional investors, as they require so much effort. Given the choice, investors prefer to work on bigger deals.

“The smaller the Euro PP issuer, the more bespoke the transaction has to be,” says Calixte. 

The credit analysis for small companies can be time-consuming and costly.

“It’s a credit-driven market,” says Floriano Ascensao, Crédit Agricole’s head of European private placements in Paris. “You have to understand the credit with a deep diligence, which is a long process.”

One institutional investor based in Paris says: “It’s a bit of a hassle to analyse a small credit when you know you’re only going to get a tiny ticket. What we’re hoping for is larger issuers from Benelux, France, Italy and Spain in particular to sell Euro PPs.”

However, the hope that issuers across Europe will come to regard the Euro PP product as a natural source of funding is starting to fade.

A few years ago, you would have been hard pressed to find a Euro PP participant who had not set his or her sights on taking the instrument across Europe. The EU’s Capital Markets Union drive was widely expected to help build a pan-European market — Brussels is usually in favour of promoting things by harmonising them.

But a CMU report in February, while praising the Euro PP market, tended more in the direction of other European countries aping the French success by creating their own separate domestic markets.

Countries that were well positioned to do so would have a healthy supply of small and medium sized enterprise (SME) borrowers needing alternative financing for domestic private debt markets to prosper, the report found. “This can be amplified, for instance, by a high dependency on bank loans or a rather illiquid banking [system], as is the case in Spain or Italy,” it said.

Italy, for example, has some 4,755 prospective issuers, with annual revenues in the targeted range of €75m-€5bn, as well as a government with a track record of supporting alternative financing.

“Italy introduced legal changes and standardised documentation to support its private placement instruments, launching the ExtraMot Pro [the multilateral trading facility] for corporate bonds, including also the Italian minibonds, in 2013,” the report noted.

The CMU report contains a design for the best foundation for growth — focused on constructing standardised documentation and facilitating active participation by institutional investors. 

“The report confirmed what we already knew about the Euro PP market,” says one Euro PP banker. “Basically, the momentum to take the product across Europe fell as we realised it was simpler to tie up domestic institutional investors and domestic issuers that all know the same legal and regulatory frameworks.”

The European Commission does not wish to impose regulations on a supranational level, which makes harmonising private debt across Europe less possible.

This is recognised by the shrewder market players, who are beginning to accept that the Euro PP market could remain French-focussed for the foreseeable future.

“It is less likely that issuers European-wide will start using this specific product than it was three or four years ago,” says the banker. “I’m afraid it might be time for us to give up the name ‘Euro PP’.”