In this month's briefing we take a look at pan-European private placements.
Pan-European Private Placements
Since the financial crisis of 2008, many European companies, particularly mid-sized, unlisted companies, have faced issues in acquiring debt funding and European borrowers have had to diversify the sources of funding they have used. European governments are keen to support initiatives which are aimed at solving the funding problem and contributing towards economic growth. Private placements are one means of financing which can be particularly useful for medium-sized, usually unrated and unlisted companies (although they can also be used by larger or smaller borrowers). As a result, in recent years, the development of a pan-European private placement (PEPP) market has gathered pace.
Europe vs US
The United States has a well established private placement market, which uses standardised documents in the form of a model note purchase agreement, and the volume of issues in the market are high. The European market has however remained more fragmented. In Germany, the Schuldschein loan market is well established and has seen increased volumes for non-German issuers since the 2008 financial crisis, but this market does not have standardised documentation and is still primarily a German product issued by German companies and invested in by German banks and insurance companies. In the Netherlands, France and the UK, there is a relatively new, but expanding market for private placements, but until very recently, as in the Schuldschein market, there has been no standard documentation. It was felt, by the relevant interested parties that, if the PEPP market was to develop and compete with the US private placement market, agreement on common market standards and best practices was essential. There have been a number of PEPP market initiatives produced by interested parties, all aimed at pushing the development of the PEPP market towards something that could provide meaningful competition with the US market.
Recent PEPP market initiatives include the publication of:
- the Charter for Euro Private Placements by the Euro PP Working Group (a French financial industry initiative, which brought together corporate borrowers, investors and intermediaries and endorsed by all the relevant French financial industry associations);
- two model agreements (a form of loan agreement for PEPP Loans and a form of subscription agreement and terms and conditions for PEPP notes) by the Euro PP Working Group;
- a set of standard form documents governed by English law by the LMA (including a form of facility agreement, a form of subscription agreement, a form of term sheet for use with either the recommended form of facility agreement or subscription agreement and a confidentiality agreement for use with the recommended form of facility agreement or subscription agreement); and
- the Pan-European Corporate Private Placement Market Guide. This was put together by the International Capital Markets Association together with market participants and key industry bodies, such as the LMA and the Association for Financial Markets in Europe. It evolved out of the Charter for Euro Private Placements and is a general guide to the PEPP market objectives and characteristics, the standard documentation that is available, the various parties documents and timetable of a PEPP and the key processes involved in a PEPP.
In addition to the publication of the above standardised documentation and guidance, there have also been changes to legislation and other governmental policies in the EU which have been aimed at supporting the development of the PEPP market. For example, the Finance Act 2015 introduces a new exemption from withholding tax on interest on qualifying private placements in the UK.
Hopes for the future
The market initiatives put in place over the last few years have built on the momentum towards the development of a credible PEPP market. Despite the difficulties that can arise due to the private nature of these deals and the fact that the market is primarily made up of new issues and long-term investments (which can mean there is a lack of performance data, making it difficult to assess the performance of such deals and as a result, mean they are more difficult to price), it is hoped that the various standardised documents and guidance that have been developed can help to set a market standard for PEPP based on European and international credit market best practices, self-regulation and adoption of industry practice and that they will strengthen the identity and recognition of the PEPP market.
They do seem to be making a difference. There does seem to be a desire from relevant corporates and investors (largely insurance companies and asset managers) for the PEPP market to grow and to successfully rival the US as shown by their participation in the various initiatives. In France particularly, there have been a number of recent PEPP issues, including a €225m issue by Fareva, a €199m issue by Safran SA and a €146m issue by Nexity SA. Additionally, Allianz Global Investors, Aviva, Friends Life, Legal & General, Prudential and Standard Life have committed to investing £9bn in UK corporate private placements and infrastructure projects, following the change in the withholding tax treatment on qualifying private placements. It will take time for the market to develop and for the impact of the various initiatives discussed to become clear, but the market is growing and it is very possible that over the next few years, it will become a credible alternative to the US private placement market for European companies and investors alike.