There are some warning signs for the world economy on the horizon. But are the macro-risks reflected in the pricing? By Jackie Bowie.
As Europe’s companies are shifting away from their reliance on bank lending for their funding needs, one corner of the market is getting more attention: debt private placements.
"Banks have retrenched over the past few years, so alternative sources of finance have come to the fore," says Carlo Rusche, assistant director in PwC’s debt and capital advisory team. "Public bond markets have been incredibly hot, but are typically only accessible to larger companies.
However for companies that aren’t able to access this market, the private placement market provides a very attractive alternative."
Unlike their public bond cousins, private placements do not require issuers to go through the process of getting a public rating. And, as investors increasingly seek yield, pricing is becoming very keen indeed, making it an attractive option for the borrower. Meanwhile, deal sizes in the private placement market have been getting smaller and the main investors in this area – primarily US insurance
companies and pension funds – are increasingly looking to Europe.
"The private placement market in Europe is opening up to SMEs," explains Rusche. "In light of yield compression at home, US investors continue to seek yield opportunities in Europe and simultaneously a number of European institutional investors are actively targeting the lack of liquidity in the SME space. In recent years, traditional private placement investors looked primarily to larger, investment grade, often listed companies. That excluded a lot of businesses, but as US investors continue to seek yields elsewhere, many investors are now looking at relatively smaller companies."
Indeed, there is such an appetite for assets, according to Angus Whelchel, head of EMEA private capital markets at Barclays, that deals are often substantially oversubscribed: "This demonstrates a real demand from investors that needs to be put to work."
On the supply side, there are developments, too. "Many treasurers and CFOs are now familiar with private placements and view this product as another vital funding alternative to consider," says Whelchel. "They know the process and they know the players.
What’s really interesting is that once a company has completed a private placement, they often become repeat issuers and, as a result, supply is supported in the UK and Europe over time." For example, Anglian Water has accessed the market several times over the years.
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