Intimate world of private placements

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Private placements (PPs) are
private as opposed to public
securities. In the case of
PPs, securities are offered
directly to a limited number
of investors and are exempt
from stock exchange listing or public
registration and usually unrated.
The most common form of
private securities are long-term,
fixed-rate debt. These securities
tend to be ‘buy and hold’ and are
not generally traded in a secondary
market, although secondary markets
do exist.
The US Private Placement (USPP)
market, though smaller than the
public markets, is of significant
size. In 2004 there were around
$45bn(€36bn) of new issuance in
the PP market.
Traditional USPPs are permitted
because of a general statement in
Section 4(2) of the 1933 Securities
Act which allows issuers to not register,
providing they meet certain
criteria. The offering must be limited
to a certain number of ‘accredited’
investors and there should be
no advertising or press releases in
the US. The predominant investor
group are insurance companies, led
by Met Life and the Prudential.
According to Jocelyn Monk,
Global Head of Private Placements
at Royal Bank of Scotland Capital
Markets (RBS), PPs are an important
source of funds for many companies.
“Many corporates need
longer-term finance than is available
from bank loans. Those companies
with no credit rating from
one of the recognised agencies,
however, are effectively shut out
from accessing the public markets,
which are increasingly demanding
a credit rating as a pre-requisites.”
It is not just un-rated companies
which access the PP markets. The
public markets often require minimum
issuance sizes, which is not
the case for PPs. The company
might require funding spread over
different time horizons and so the
maturity profile of the deal may
have different tranches. There are
additional cost advantages to
avoiding registration and much
simpler disclosure requirements.
Advisory costs are significantly
lower and the whole process can
often be completed much more
“The key to the private placement
market is that it is relationship-driven
and deals are tailor-made,” says
Marie Fioramonti, managing director
of international private placements
for Pricoa Capital Group.
“Each deal takes a different time to
arrive, be that weeks or months, as
information flows between borrower
and lender. The agent bank
liases between the client and
investor(s) to gauge investor interest
and requirements. The relationship
between client and investor is
thus much closer than in the public
One of the bigger UK
investors in private placements
is Prudential M & G,
where Calum McPhail is head of
private placements. He also stresses
the importance of the relationships
between lender and investor. “In
our market, investors are typically
buy and hold, so relationships are a
very important part of the investment.
We endeavour to meet with
all of the companies in which we
invest. The screening processes for
every deal are intensive, as we
undertake all our own analysis, not
relying on any third-party credit
rating input.”
As well as getting to know the
individual company, each individual
deal is unique and must be
analysed too. Each investor will
have a bilateral agreement with the
borrowing company, setting out
the deal’s terms and conditions.
Most, but not all, PPs will involve
financial covenants, which private
placement investors value greatly.
McPhail says: “While we cannot
argue that private placements are
liquid, we believe that the existence
of financial covenants are mitigants
to the liquidity issue. We do
not have to hope that we identify
detrimental news before other
investors because, with a covenant
in place, the company must come
and talk to us directly to avoid tripping
the covenants. Away from
public scutiny we can work
together to restructure the transaction,
or give them the breathing
space to get through the problem.
“In studies undertaken in the US
comparing distressed securities
held in public and private portfolios,”
continues McPhail, “it was
calculated that there was a 25 basis
point advantage in terms of recovery
rates, to having financial
covenants – not something you get
from day one but certainly an
advantage that will accrue with
More recently, the USPP market
has also come to provide a significant
source of funds for European
companies looking for capital.
Indeed in 2003, more than half the
US PP issuance was derived from
European companies and the share
in 2004, though down slightly, was
still more than 45%.
Although there is plenty of PP
supply from European companies,
these deals are usually
sold to US investors. European
investors are not significant players
in today’s PP market, although in
the past there have been similar
investment channels in place.
Christian Lutz is head of corporate
loans at insurer Allianz. “We
have been active in this area in Germany
for many, many years,” he
says. “After the war, insurers
became an important source of
long-term debt capital. During the
1980s, however, many participants
dropped out because the capital
market provided better conditions
for borrowers. Investment rules for
insurers were very strict compared
to banks; collateral was needed to
back each loan. The supply of loans
dried up for the insurers.
“Allianz was one of the few to stay
in the market. However, we have
seen in the last couple of years, a
revival of ‘Schuldschein’ notes
which are loans issued against
promissory notes, typically with
maturities of seven-10 years.”
The Schuldeschein growth is in
part due to the European market’s
increased interest in credit products
generally and to the search for
yield in this low interest rate environment.
Lutz says: “Another reason
for increased demand from
German investors may be the fact
that the (relatively) simple documentation
is in German, unlike the
usual private placements offered by
US investors and the issue is in
euros. We are trying to modernise
the investment rules for insurers in
Germany in co-operation with the
supervisory authority, aiming to
increase the popularity of these
“I do believe that the lack of
resources is a significant reason
why more European investors are
not involved in PPs,” argues
McPhail. “While many institutions
are staffing up their credit teams,
they do not yet have spare capacity.
European investors tend to be
much more benchmark-focused
than those in the US and are more
concerned with relative rather than
total return, which perhaps argues
against investment in PPs. And
another potential problem is that
the EU is not unified, unlike the US,
in terms of its legislation. But I
believe the differences between the
European legislations are not that
significant and should not be a
deterrent to an investor seeking
involvement in PPs.”
“Another great advantage of private
placements for us is the name
diversification we achieve,” says
Fioramonti. “It is hard to outperform
a public market index when
everyone has the same names in
their portfolios. Yes, this is a labour
intensive asset class but diversification,
covenants, direct relationships
with the companies in which
we’ve invested means that we
believe we can make better credit
decisions than is sometimes possible
in public bond markets.”
And McPhail warns that the current
benign credit environment
might be masking some dangerous
situations in the public markets. He
says: “When it gets tougher and we
see defaults, that may force a wakeup
call for many who have been
caught out, and it should reinforce
the benefits of covenants.”

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