French firms tap private US lenders as banks run dry

Mon Nov 12, 2012 5:59am EST

* U.S. private placements by French firms 3.1 bln euros

* Rise in issuance a sign of banks' lending retreat

* French private debt market still in infancy

* Advantages include lengthy terms, lower rates

By Christian Plumb

PARIS, Nov 12 (Reuters) - Listed on the French stock market based in a suburb of Paris, mailroom equipment maker Neopost is an unlikely trailblazer in international debt markets.

But by tapping the U.S. private debt market, it has shown the way for a growing band of small and medium-sized French companies that need dollars to do business in the United States.

France's own banks are increasingly unwilling or unable to provide such funding and are cutting back lending across the board in austere times.

"It's become more and more difficult to obtain dollars through the traditional banks," Neopost Chief Financial Officer Jean-Francois Labadie said in an interview.

"As a consequence, many French companies are starting to discover the American private placement, which remains a very compelling source of dollar financing."

Such placements by French companies hit a record $3.1 billion in the first half of the year, up from $825 million for all of 2011, according to Thomson Reuters data. That is the highest of any European country aside from the UK.

Companies with global operations, like Neopost, are looking for places to borrow dollars to fund activities such as leasing.

Borrowers ranging from supermarket chain Auchan to industrial gases group Air Liquide also seized the opportunity to borrow hundreds of millions of dollars at low rates from long-term investors: mostly insurers struggling to sqeeze adequate returns from traditional bonds.

"You can spread out the maturities much more significantly than with a classic revolving credit line, which typically has a five-year term," Labadie said, adding that 7-to-10 year terms were typical.

The private placement rush is in part a reflection of French banks' own difficulties in securing dollar funding since late last year and is part of a wider trend of European borrowers cutting their dependence on lending from banks trying to shrink their balance sheets.

DRIVE TO DIVERSIFY

French demand has been a big chunk of a wider spike in European corporate use of U.S. private placements, which stands at 36 percent of a market valued at $48.2 billion so far this year.

"The diversification away from relying too heavily on bank lending has been a driver of issuance in this market," said Angus Whelchel, managing director in private capital markets at Barclays Capital, adding that some of the deals stem from last autumn, when a crisis of confidence at French banks convinced some borrowers they should look for funding elsewhere.

"After the crisis, issuers were much more conscious of how they reviewed financing plans," he said. "At that point a lot of issuers realised they can't be so reliant on their banking group for all debt-related financing needs."

Private placements are also a godsend for companies that lack the credit ratings generally required to sell bonds, though that formerly stringent requirement has been loosened in some cases as the bond market has heated up in recent months.

French companies borrowing in the first half paid interest rates from 2.65 percent to 5.5 percent.

Their thrust into the U.S. private placement market is also a product of the lack of a strong French version of the U.S. 144a market and German Schuldschein equivalent, which allow unregistered securities to be sold to institutional investors.

Domestic banks and insurers have made moves to create such a market in recent months - insurer AXA, for example, struck lending joint ventures with banks Societe Generale and Credit Agricole.

BNP Paribas also recently announced that it was raising a fund to provide loans to small and medium-sized enterprises (SMEs), but in France such efforts remain embryonic.

SHIFTING LANDSCAPE

Most of all, the U.S. private placement boom is emblematic of a seismic shift in Europe, where SMEs have always been able to rely on their banks for credit, but fear they will not be able to for much longer.

"The banks in Europe are going to shrink," said one U.S. private placement market source, speaking on condition of anonymity. "It's going to happen because there's not enough equity for all of them to become adquately capitalised enough and compliant with Basel III (bank capital rules)."

While the vast majority of French businesses still finance themselves through bank loans, in stark contrast to the United States, where most financing happens through bonds and other market sources, the landscape is shifting.

By this past summer 36 percent of French corporates were getting their funding from market sources, up from 32 percent the summer before and 27 percent in 2008, according to a recent Deutsche Bank research report. Market funding for French companies soared 15.5 percent in August, while bank debt edged up 0.9 percent, according to the same report.

U.S. private placements by French companies such as Faiveley Transport and Essilor International in the first half also reflected how market turmoil made it hard to access the conventional bond market. Since the bond market has moved into overdrive this autumn, the pace of private placements could ease in the second half, but it's likely to remain strong in the years go come.

"It's becoming a mainstream alternative as opposed to a little niche product," Whelchel said. "The liquidity in the market is tremendous right now."

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