Market pins hopes on European private placement market

Fri Jun 13, 2014 12:07pm EDT

Related Topics

* ICMA leads working group

* Cost and time savings for issuers

* Best practice guide due at year-end

By Charlie Thomas

LONDON, June 13 (IFR) - A greater degree of teamwork from bankers, investors and trade bodies could help with the creation of a pan-European private placement market after a series of false starts.

The International Capital Market Association (ICMA) is spearheading a coordinated effort to set the groundwork for a European private placement market, designed to provide meaningful competition to the US market.

The US private placement market raises around USD50bn a year. That compares to the EUR7bn raised by the French market in the past two years, while the German Schuldschein sector is thought to raise around EUR15bn a year.

"I've not seen this level of collaboration in the 20 years I've been looking at this," said Phil Smith, partner at Allen & Overy and working group member. "We've been approached by all aspects of the financial community, government and Treasury to ask how we can make this work."

A pan-European market would bring cost and time savings for issuers through standardising documentations and processes, according to proponents of the plan, as well as diversification and yield benefits for investors.

For the first time, the working group involves members from a variety of interested trade bodies, including the Association for Financial Markets in Europe (AFME) and the Loan Market Association (LMA), as well as representatives from major institutional investors, the HM Treasury and Banque de France.

For issuers, the advantage of a European market place will be a "well defined, deeper market with clear common standards that will make deals attractive to a wider variety of investors," according to the ICMA's director Nicholas Pfaff.

Market participants hope that by developing a European private placement market, smaller corporates that have had trouble getting financing will be able to source funding more easily.

Expectations are that crossover credits will be the first to access it, although some hope that investment-grade issuers will visit as it develops.

GOOD TIMING

The development would come at an opportune time given that the impact of new regulations on swaps, such as the European Markets Infrastructure Regulation, could push European issuers to switch away from the US markets, they said.

David Cleary, co-head of US private placements for corporate DCM at Lloyds Bank, welcomed the move as a "really positive step", but warned the practicalities of setting up a marketplace which could cater for all investor needs could be challenging.

The challenge would be to take the best parts of the existing French and German markets and bring them together, he said.

"If they don't, you'll end up with French investors only investing in French companies on their own French private placement market, and the same happening in Germany," he added.

The momentum for the project is such that even if the environment changed and banks were able to start lending more meaningfully again, many believe this pan-European private placement market won't be derailed.

"Against the backdrop of the financial crisis, a need developed to provide a diversified source of finance for corporates," said Allen & Overy's Smith.

Investors are also keen on the strategy, given it provides them with diversification of income, while a European market which caters for crossover issuers would also provide buyers with access to a whole new sector of potential credits.

"Pension funds are attracted to the characteristics of placements - strong, stable cash flows and covenant protections similar to a loan," said Calum Macphail, head of private placements at M&G Investments, which has invested EUR5.6bn in private placements since 1997.

He added that the illiquidity premium harvested through investing in medium or long term assets which provided regular income also gave investors more bang for their buck.

WORKING HAND IN HAND

The impact on existing private placement markets was difficult to quantify. Many believed that while some impact would be seen on the US market, for some issuers the well trodden path to a deep, liquid market which understood them would be worth paying the currency swap for.

Others felt that there was no reason why existing markets couldn't work alongside a new European one, complementing it rather than providing competition.

Ultimately, the demand for a European private placement market will have to come from issuers, according to Lloyds' Cleary. Given many corporates were awash with liquidity, particularly in the UK, he anticipated a slow, incremental demand initially, rather than a big shift.

The ICMA-led working group plans to produce a best practice guide, facilitate the emergence of common market principles and standardised documentation, and identify barrier to entry for new issuers and investors by the end of 2014. (Reporting By Charlie Thomas, editing by Julian Baker and Helene Durand.)

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