Joining forces to develop a pan-European private placement market

Debt Markets Update

Joining forces to develop a pan-European private placement market

There is little doubt that alternative finance continues to be a very hot topic. While small and medium-sized enterprises (SMEs) and unrated borrowers continue to require credit, there is also evidence of increased liquidity from a new breed of alternative investors (particularly insurance companies and pension funds). Over the years the US private placement [USPP] market, which raises about $50 billion a year, has evolved to become an excellent source of alternative funding for European mid-sized corporates, particularly following the financial crisis. Although this is a positive development, the common perception among financial market players is that further development of a European private placement [PP] market is necessary.

Rationale

The development of a pan-European PP market will increase the ease and simplicity with which European issuers can borrow and investors can invest. Through standardization of documents and processes this new market could potentially lead to cost and time savings. Besides this it will widen corporate access to non-bank debt (which is a recent policy objective by various national governments as well as the EU). Furthermore it will make it easier for European corporates to borrow in their own currency and they will not be limited by what the swap markets can provide as the USPP market is primarily a fixed-rate dollar market.

Also from an investor’s point of view there are potential benefits. If Europe can develop a broad and deep market with clear common standards, investments will be more attractive. A pan-European PP market also improves the diversification of the investor’s asset portfolio.

Joining forces

As many European trade bodies agree on the benefits of the development of a standardized pan-European platform for private placements, a number of these bodies have now joined forces. The International Capital Market Association (ICMA) has taken the lead in a working group and they are joined by the European Private Placement Association (EU PPA), the Association for Financial Markets in Europe (AFME), the Association of British Insurers (ABI), the French Euro Private Placement (Euro PP) Working Group, the Loan Market Association (LMA) as well as several representatives of major institutional investors and the larger law firms. This Workgroup aims to produce best practice guidelines, standardized documentation and common market principles by the end of 2014. They are also committed to identifying barriers to entry for new issuers and investors.

Challenges

Currently the European market for alternative funding is quite fragmented. Over the past three years the French and UK markets have developed from next to nothing up to €3-4 billion a year; the Schuldschein market has fluctuated between €8 billion and €16 billion a year; and the US PP market had ranged from €13 billion to €16 billion a year. France, in particular, had seen a spike of new deals in 2014, with 37 deals being recorded, ranging from €20-€200 million in deal size. It will be challenging to improve aspects of the above and bring them together to create a pan-European market.

Another challenge that will have to be overcome is the lack of track record. A European framework of clear principles may help build this track record as it may convince some strong and creditworthy corporates to try to tap the European markets. Another requirement to make it all a success will be to develop investors’ ability to analyze unrated credits and the current lack of transparency will also have to be overcome.

It is clear that there is much work to be done and it may even take five to 10 years for the pan-European PP market to fully develop. Having said this there is an undeniable increasing willingness to engage in alternative debt transactions from both borrowers and investors, and we are confident that the steps that are currently taken by the PEPP WG will increase funding opportunities for mid-sized corporates in Europe in years to come.

Update European Corporate yields

*source: Bloomberg, European Corporate Bonds index, 5Y average maturity
(over 600 index members, yield = Yield To Worst)