The logic that Europe should have a private debt placement market of its own, to match that of the US, is hard to gainsay. Europe’s economy is a similar size; it has companies not suited to the public bond market, because they are unrated or do not want a big lump sum.
After the crisis, when banks balked at funding companies and institutional investors were struggling to find yield as interest rates fell, this idea’s time had come.
The UK had its own currency and long links with the US PP market; Germany had its Schuldschein. So it fell to France to create the Euro PP. The French corporate finance community got behind the idea in 2011-12 and made it happen. A collective effort produced a Charter, documentation, new teams at investment banks, conferences.
Seven years on, the buzz has gone. The initial burst of issuance has not surged into anything like the US PP market. The first wave of French midcap issuers has not been replenished sufficiently, so the average deal size is just €60m. The product has not so far attracted many issuers outside France, enabling it to grow into a pan-European market. Many of the bankers who led the early drive have moved on.
Where was the flaw in the logic? First, Europe is not the US. The 3,000 Russell-listed US companies have an average market cap of $10.8bn. The average of the Stoxx Europe is €13bn, but there are only 600 of them. European industry is far more fragmented, so the number of companies big enough to borrow €100m is far smaller.
Second, what seemed in 2012 an ideal time to launch an institutional debt market quickly became a harsh one. European Central Bank president Mario Draghi did “whatever it takes” to save the euro — squashing interest rates and pumping money into the banks.
At the beginning of 2012 the average five year euro government bond yield was 1.6%. By early 2015 it was negative, and it has stayed that way.
Banks may carp at low rates, but they can borrow cheaply if they have to lend cheaply and leverage their capital. Not so insurance companies and pension funds — their savers want a real, positive return on their money. Earning 100bp over a five year mid-swap rate of minus 0.1% is not going to keep anyone warm in retirement.
Diversity play
This does not mean companies have given up on capital markets and turned back to traditional bank financing. The modern treasurer wants diverse funding sources.
But the new Euro PP has two rivals: the Schuldschein and US PP. Each has many experienced investors, only too happy to soak up deals from France and elsewhere.
And each has a secret weapon. The Schuldschein’s is that its investors are banks, which can lend at far lower rates than most institutions.
Rudolf Bayer, head of MTN and private placement syndicate at UniCredit in Munich, points out another. “The Euro PP requires a bond documentation,” he says. “It’s much more complicated for an issuer to set up, compared to a Schuldschein, which is a loan based on German civil code regulations.”
The US PP is dominated by US life insurers, which need to make inflation-beating returns — but they aim only to beat the tightly priced US public bond market and can pick up money on the basis swap to dollars.
Despite all these headwinds, the Euro PP is not doing badly at all. “The commentary is too harsh,” says Michael Bures, head of debt capital markets, corporates, at Raiffeisen Bank International. “Eight billion euros of issuance in 2018, in smaller deals for smaller corporates — that’s really useful for the economy. It’s super-useful to have a domestic market where you can borrow, as an unrated company, or one with special needs, such as for longer maturities.”
The space for the Euro PP is squeezed by its two bigger neighbours, but there is a space.
What the Euro PP lacks is a clear profile. That €8bn is far higher than the €1.7bn counted by the law firm CMS Francis Lefebvre, which tracks all press-released deals.
Yet the €8bn figure is also too low. Amundi lent €1.3bn in 2018, but much is in bank-led club loans not counted in statistics. Niche asset managers like Muzinich and Tikehau seek out smaller companies with specialist needs and offer a variety of debts including unitranche and mezzanine.
For single-B issuers and below, neither the Schuldschein nor the US PP market is receptive. “That is for the Euro PP market,” says Bayer, “which offers a different investor base that looks at companies in a different manner.”
In March, Compagnie de Phalsbourg, a privately owned shopping centre developer, issued a €112m green Euro PP paying 5% to its five year maturity. With mid-swaps at around zero, that was a 500bp spread — almost unheard-of in Schuldscheinland.
This need is not likely to go away, nor is it confined to France. Institutional direct lending, of which the sapling Euro PP is part, will one day be an oak. s