According to the LMA the template documentation is launched in response to a low level of transparency and a lack of standardised documentation, which form material barriers to growth of the European private placement market. The LMA PEPP template documents are intended to be used as a starting point for drafting documentation; in practice, a large number of provisions will need to be tailored to the commercial specifics of a given PEPP transaction. Until now, there has not been a pan-European private placement market comparable to the SEC Rule 4(a)(2) private placement (USPP) market in the United States (1). It will be interesting to observe whether the standardisation attempts by the LMA will indeed result in a more developed PEPP market. An alternative to the LMA PEPP template documentation is offered by the Euro PP Working Group.
Although quite a wide range of transactions could fall in the "private placement" category, in general, a private placement transaction is likely to consist of a medium or long-term debt financing transaction between a medium-sized, usually unrated, private or listed borrower who aims to diversify its funding structure by considering alternatives to the bank loan market or the established European capital markets and one or more institutional investors (typically insurance companies, pension funds and asset and wealth management enterprises). A private placement transaction may be structured in the form of a loan or in the form of debt securities (notes). For this reason the LMA launched a template PEPP Facility Agreement (for loans) as well as a template PEPP Subscription Agreement (for debt securities). By investing in private placement transactions, institutional investors hope to achieve greater risk diversification and enhancement of financial performance, and in return they offer access to capital outside of the syndicated loan and high yield debt markets. The PEPP Subscription Agreement has been mainly developed for institutional investors with internal compliance requirements, which require a certain part of their investments to be structured as loan notes.
PEPP borrowers may choose for a private placement transaction because they would like to approach specific, diverse or local investors or because of its flexible custom-tailored structure with options for longer maturities, fixed interest rates and a flexible payment structure. Although a private placement transaction is typically expected to have a medium to long tenor and a senior unsecured status, in practice the structure is quite flexible and there are many private placement variations possible. As a starting point, the LMA PEPP documentation templates have been based on the LMA Investment Grade Single Currency Term Facility Agreement (2). The same basic structure and "boilerplate" wording from the LMA recommended form of primary documents are also used in the PEPP Facility Agreement. In turn the PEPP Subscription Agreement is based on the PEPP Facility Agreement and is intended to mirror as closely as possible the commercial terms of the PEPP Facility Agreement. As such, the LMA approach to the documentation of PEPP bond transactions does not resemble the approach used in listed bond transactions more commonly seen in the European capital markets.
The LMA PEPP Facility Agreement is intended to document a single currency unsecured term loan facility, designed for use by one borrower and makes provision for a guarantee to be granted by one or more subsidiaries or affiliates of such borrower. This document assumes one or more investors will act as lenders, and will deal directly with the borrower, as there is no facility agent and no arranger, though the LMA has noted that agency provisions could of course be added if required. Under the PEPP Facility Agreement, the facility is expected to be drawn in full and repaid in full on its final maturity date. Interest periods are expected to be fixed in advance and parties can choose between a fixed or a floating interest rate.
As previously mentioned, a number of provisions will need to be tailored to each specific transaction, such as provisions dealing with representations, undertakings and events of default. Unlike typical bond transaction documentation, the LMA PEPP Subscription Agreement contemplates that the issuer will give relevant agreed representations and undertakings directly in favour of each holder of the notes. In addition, private placement lenders are likely to expect provisions regarding make-whole payments to be included, whereby it is left to the parties to negotiate specific formulas for calculation of make-whole amounts in case of early prepayment. In addition private placement investors would commonly expect a more favourable terms provision to be included in the transaction documentation. By means of background, a more favourable terms provision requires a borrower to ensure that if it grants other lenders more favorable terms with respect to its other financings, it will offer identical terms to the PEPP investors.
Apart from the documentation, there are other differences between regular loan finance transactions and private placement transactions. Private placement transactions might have a slightly greater completion risk than regular transactions, as the investor approval process typically starts at the rear end of the transaction, i.e. the moment the documentation is almost fully agreed.
Until now, there has not been a pan-European private placement market comparable to the SEC Rule 4(a)(2) private placement (USPP) market in the United States (3). It will be interesting to observe whether the standardization attempts by the LMA will indeed result in a more developed PEPP market.
The LMA PEPP documents are available for downloading on the LMA website: www.lma.eu.com(accessible for members only). An alternative to the LMA PEPP template documents is offered by the Euro PP Working Group. Their documentation can be downloaded from www.euro-privateplacement.com (free of charge).