JP Morgan and Morgan Stanley arranged the deal. Investors who had been shown the terms told GlobalCapital that Vanguard was raising money for capital expenditure. The Pennsylvania-based asset manager, according to a US institutional investor, received a top notch rating from the National Association of Insurance Commissioners (NAIC 1). Capital charges for insurers holding Vanguard's private placements will therefore be low.
“For many in the market, the deal was a no-brainer," said an arranger from a European bank. "Vanguard is incredibly well known, massive and with a steady cash flow. It also doesn’t have public debt, which may have helped draw in extra cash from public desks at US institutions.”
Seven slices
| Maturity | Size | Spread (over Treasuries) |
Coupon |
| 10y | $300m | 140bp | 1.94% |
| 12y | $200m | 150bp | 2.04% |
| 15y | $265m | 175bp |
2.29% |
| 20y | $850m | 170bp |
2.67% |
| 30y | $650m | 185bp |
3.05% |
| 35y | $235m | 193bp | 3.13% |
| 40y | $500m | 205bp |
3.25% |
The world’s second largest fund manager, Vanguard has over $6tr of assets under management. The public bond curve of BlackRock, the biggest, was used to find fair value. “Vanguard’s PPs were pretty cheap compared to BlackRock’s public curve,” said an institutional investor from a US insurance company, who noted that it was rare to see US deals reach out to 40 years.
Vanguard is owned by its funds as opposed to shareholders. This means the firm only needs to cover capital expenditure and business development, without needing to hike fees in order to generate profits for owners.
Its founder Jack Bogle, built Vanguard from 1975 on the assumption that investor returns comes from low costs, against the prevailing view that stock picking drives return.
Vanguard has been in the market once before, according to GlobalCapital data, selling $600m of US private placements in 2010. According to a market source, coupons ranged between 4.63% and 6.16% for that deal.
But the cost of debt has fallen since then, and the private placement market has expanded. One banker told GlobalCapital that when he started, before the financial crisis of 2008, a $3bn deal would have accounted for roughly 8% of the annual deal flow.
The market had roughly $100bn of deal flow last year, half of which was from US borrowers. This year, during the coronavirus, the US part of the market has seen some large transactions.
The National Football League, the professional American football competition in the US, issued $1.7bn of US private placements, with over 40 investors participating in the transaction. According to two sources, US investor Prudential Real Estate Investors issued more than one billion dollars worth of US private placements in the past month.
"US companies tend to rely less on bank debt than their European counterparts," said one US PP banker in London. "So when companies in Europe were looking to draw RCFs and hash out additional lines of liquidity with relationship banks, US companies were looking to the bond market and private placements. The Vanguard deal is both a good illustration and the largest illustration of this."
Before this transaction, US confectioner Mars held the record for the largest deal in the PP market, with a $2.5bn offering in March 2017.
Vanguard was named after one of the British battle ships that fought under Horatio Nelson in the Napoleonic Wars. Thomas Hardy, who Nelson uttered his famous last words to, was its captain from 1798 to 1799.
A Vanguard spokesperson, in response to a request for comment, said: "Given current favorable market conditions including low interest rates and strong investor demand, Vanguard believes the private placement debt market offers an opportunity to raise additional capital that provides increased financial flexibility on attractive terms."