Debt Financing’s Best Kept Secret: Private Placements

The US Private Placement market is an alternative to debt financing without the need for formal credit ratings and financial reporting requirements.

1 April 2014


By Michelle Wu and Isabel Munson

The US Private Placement (USPP) market is an alternative to bank financing without the need for formal credit ratings and financial reporting requirements which are must-haves for public bond issuance.

For those of you that are not familiar with private placement bonds, the Advantus Capital Management report, Private Placement Bonds: Shedding light on a valuable alternative, defines this type of debt as “…unregistered debt securities sold directly in the private market. They combine features of corporate bonds and bank loans, offering the longer duration of…bonds while providing similar legal protections to those found in…loans.”

Recently we had the chance to attend the 27th Annual Private Placements Industry Forum in Miami, Florida, where we had the chance to speak with bankers and investors that use Intralinks Debtspace™ as part of the deal marketing process or for private placement transactions. While at the conference, we saw a common theme: issuers favor the flexibility they have in this market. Conference attendees pointed to several transactions with a delayed funding provision.

The Great Rotation

One of the most interesting panels was The “Great Rotation” and its impact on the Corporate Bond Market presented by Hans Mikkelsen of Bank of America Merrill Lynch. The “Great Rotation” theory holds that varying market expectations and changes in long-term interest rates will cause investors to shift their money between bonds and equities. Mr. Mikkelsen spoke about several aspects of this theory, including:

  • The rising interest rates translate to lower bond prices, which can affect demand and trigger a “Great Rotation”
  • BofA Merrill Lynch Global Research Economists and Rates Strategists had predicted 10-year Treasury yields to be at 3.75% in the third quarter of this year
  • This is a bullish view since consensus was 3.25% in Q3 by the rest of the street, according to Bloomberg

As we move into a rising interest rate environment, we will see how the “Great Rotation” will affect supply and demand in this market.

European Private Placement Market

Another topic of wider discussion was the European Private Placement market.  While several regional markets already exist in Europe, none of them have a volume rivaling the US Private Placement market ($51 billion in 2013 according to Thomson Reuters) where European corporates also raise money.  When will this market finally gain momentum?  The right market factors seem to be falling into place:

  • European banks have been under pressure to curtail lending in an attempt to improve capital ratios
  • The recent formation of a European Private Placement Association (EUPPA) aims to standardize documentation and best practices while providing educational and lobbying resources for its members
  • The Loan Market Association, a trade group, has announced that it is working on standard templates for new issuers, which may help cut legal costs
  • Several European investors have come to the table announcing that they have demand for investing in private placements like M&G and Legal & General

With all the ground work being laid for this emerging market, we can anticipate some changes to the European Private Placement landscape in the future.

Global Demand for Private Placements

Conference participants concluded that 2014 USPP volume would be around $60 billion.  Private placements are playing a larger role in the way institutions acquire funding.  That said, demand for private placements historically outweighs supply.  Stephen Monahan of Bank of America Merrill Lynch boldly claimed that there is market appetite to support $100 billion in volume if more issuers would consider this avenue of debt financing.

We will just have to wait until the end of this year to see how much supply comes to market. Stay tuned…

Michelle Wu

Michelle Wu

Michelle Wu is a Product Marketing Director for the Intralinks Banking and Securities vertical and is responsible for all aspects of the go-to-market strategy for the debt capital markets business. Prior to joining Intralinks in 2011, Michelle was an investment banker at HSBC focused on capital markets origination working across various product groups in New York, Hong Kong and Japan.