Article 4.10 Thirst for funds lifts appeal of private placements

By Andrew Bolger

Financial Times June 24, 2014

Britvic is an official supplier to Wimbledon, where its Robinsons Squash has helped quench the thirst of many tennis players since the invention of Lemon Barley Water in 1935.

This quintessentially British company has found inventive ways of quenching its funding needs, including in recent years £650m in private placements, a market that was developed by US insurers as a way to make strong returns from long-term investment in companies.

Insurers and pension funds - including some from Europe - achieve this by issuing securities that are not sold through a public offering but instead directly to chosen investors.

Now leading European investors and finance trade bodies that admire this US fund­ing model are trying to develop a similar pan-European placement market.

‘The development of the market should stimulate further growth, enabling more companies to access the capital markets in Europe and provide investors with a new investment opportunity,’ says Calum Macphail, head of private placements at M&G Investments, which has invested ˆ5.6bn in private placements since 1997.

The private placement market for European issuers has grown in recent years, especially in France and the UK, which had an estimated combined volume of ˆ8bn in 2013.

Private placements typically provide fixed-rate financing of between three and 15 years, most commonly for seven to 10 years. Mr Macphail says pension funds are attracted to the characteristics of private placements - strong, stable cash flows and covenant protections similar to a loan.

‘In addition to diversification and stronger documentation compared to public bonds, investors benefit from an illiquidity premium when investing in medium or long-term assets which provide regular income, giving a pension fund more bang for their buck,' he says.

The International Capital Market Association is co-ordinating the work of the pan-European Private Placement Working Group that aims to establish a guide to best market practice, principles and standardised documentation. The working group will build on a Charter for Euro Private Placements, a French initiative.

The European private placement market is smaller than its $50bn US equivalent, which issued ˆ12.4bn to European companies, and Germany's Schuldschein mar­ket, which issued ˆ8.5bn to European companies last year.

The Schuldschein is a fixed- or floating-rate loan instrument, ranging in size from ˆ10m to ˆ500m. The market is used primarily, but not exclusively, by invest­ment-grade companies.

FT

Source: Bolger, A. (2014) Thirst for funds lifts appeal of private placements, Financial Times, 24 June.

Despite the progress made in Europe, even today European companies often choose to issue privately placed bonds on the other side of the Atlantic where there is a well-established clientele, infrastructure, regulation and procedures - see Article 4.11.