Pricing in the US Private Placement market is very attractive at present for euro funding

– Can you briefly describe the US Private Placement market?

– Muriel Nahmias, Redbridge: US Private Placements are multipurpose financing instruments tailored to the needs of US and European companies with a solid credit profile. Like any private placement offering, they’re essentially halfway between bank financing and bond financing.

The main investors and lenders are US insurance companies and asset management companies. They have a long-term horizon and they have a buy-and-hold approach. The market is deep, always open and highly international in nature. There’s more than USD 100 billion of new issuance every year, with nearly 30% of the volume coming from Europe.

Almost all – 98% – of the transactions are of investment-grade credit quality. Around 70% of issues are used to fund corporates, 25% are for infrastructure or project finance, and the remaining 5% to finance leases.

– Why should European corporates be interested?

By turning to the US Private Placement market, companies can raise amounts ranging from USD 50 million to more than USD 1.5 billion, with maturities from 7–30 years. That means they have a far wider range of options available to them than banks or the Euro Private Placement market are able to offer. What’s more, it’s possible to raise funds in complete confidentiality, generally without an external credit rating, and in a variety of currencies, including US dollars, euros and sterling.

Depending on basis swap conditions, it can be cheaper to access euro-denominated funding on the US Private Placement market than on its Euro equivalent. And that’s what we’re seeing at present: companies have been making savings of around 60 basis points on recent financing deals that are broadly equivalent in terms of credit quality and maturity.

Deferred funding is also possible at a modest cost. Meanwhile, a shelf programme can be granted by certain Tier 1 investors, enabling companies to lock, on an uncommitted basis, an additional amount after an inaugural issue.

– What do issuers need to pay attention to?

It’s important to bear in mind that investors in the US Private Placement market are generally highly sophisticated. They ask many questions and require clear answers during discussions. Their objectives can also be heterogeneous. The issuer must have a good understanding of the points to be negotiated and any potential hurdles to overcome if they want to optimise the terms and conditions and/or maximise the size of the deal.

The National Association of Insurance Commissioners (NAIC) assigns an internal rating to the transaction after it is issued. This rating (called NAIC designation), which in principle remains private, determines the regulatory capital charge that the insurance company must hold to back the exposure. Consequently, it may influence the positioning of investors in the US Private Placement market. Some investors may want a credit agency rating – which may also remain private – in order to secure an NAIC 2 rating.

Although the main contractual terms of a US Private Placement are generally aligned with the existing primary credit facilities of the issuer, there are some differences, particularly with regard to external debt in subsidiaries, asset disposals, financial covenants and off-balance sheet financing. Issuers also need to be aware of early repayment penalties. ‘Make whole’ clauses may be applied in the event of early redemption, as is the case with all bond financing, and they can have significant financial repercussions.

– Who are the eligible borrowers?

The US Private Placement market is only accessible to issuers of investment-grade credit quality, although they do not necessarily need an official rating. Companies wishing to access this market must have a stable business model with recurring cash flows and a maximum normative leverage level of 2x, although in exceptional conditions this may go as high as 2.5x if it is the result of the likes of mergers and acquisitions or specific one-off capital expenditure. Issuers must be leaders in their sectors, with sales of at least EUR 600-800 million per year, in our view. One thing to bear in mind is that the NAIC uses similar methodology than the major rating agencies (S&P and Moody’s), which favours large corporates. It has also tightened its criteria since the COVID pandemic. It’s possible to secure an NAIC 2 rating with other NAIC-approved rating agencies, such as DBRS or Kroll, which assign greater weight to the business profile than the financial profile.

– What are the main requirements in the documentation?

A single covenant is generally possible if the view on credit quality is solid. This leverage covenant is tested semi-annually to ensure compliance with established leverage ratios. There are limitations on subsidiary debt, generally set at between 10% and 15% of total assets. Limits are also imposed on asset disposals, with a right of first refusal on disposal proceeds if there are mandatory early repayment clauses in any of the company’s other financing.

Investors justify these strict requirements with the long maturities – up to 15 years for corporate financing – that they offer and the demands of their own investors. Their criteria ensure that the US Private Placement market is of high quality and that it is relatively safe for their investors to allocate to. There can also be tough negotiating points. We enable companies to access the attractive financing on offer in this market within a structured and transparent framework. The set-up process, which generally takes 2-3 months, must be rigorous and well prepared.

– How do spreads on euro-denominated transactions compare with what’s on offer in the Euro Private Placement market?

Historically, euro-denominated US Private Placements have offered more attractive pricing than similar deals in the Euro Private Placement market – on average, the difference has been around 40 basis points. But they’re even more attractively priced in relative terms at present – they’re currently around 60-70 basis points cheaper.