The promise of European private placements

Private placements can be a fast and flexible way of raising medium to long-term debt, with relatively lower reporting requirements. As such, they are fast becoming a vehicle of choice for mid-sector private or listed companies in Europe – companies with revenues of between €100m and €1.5bn a year – searching for alternative sources of funding to traditional bank lending.

The time is right to consider implementing a more formal framework to assist investors with due diligence, documentation and analysis of credit risk

These financing instruments are also a good fit for investors with buy-and-hold policies who are searching for yield by hoping to diversify their risk.

Increased standardisation of documentation and more consistent credit risk assessment standards will do much to make appropriate capital allocation, pricing decisions and boost the investor base.

With such initiatives in place, the pan-European private placement markets have every chance of becoming both issuers’ and investors’ first choice, helping to diversify and strengthen European capital markets – which must be in the best interests of investors and borrowers alike.

The rise of the pan-European private placement markets

As banking disintermediation progresses, overall bank lending volume is continuously losing ground. In fact, of the €32.8bn total issued in 2015 in private funding for companies in Europe, about €14bn was issued in the pan-European private placement markets, which doubled in volume in 2015 from €7bn in 2014.

This includes issuance from the French ‘Euro PP’ market, as well as private placements arranged across the rest of Europe, including in the UK. The remaining €19bn was attributable to the German Schuldschein market, which rose by an impressive 65 per cent in 2015, from €11.5bn.

Interestingly, growth was most significant at the top and bottom ends of the mid-market corporate scale. The number of very large deals – more than €150m – increased from eight deals worth €1.8bn in 2014 to 21 deals worth €6bn in 2015.

Yet there were significantly more deals for smaller companies below €50m, rising from 33 deals with a value of €800m in 2014 to 68 deals worth €1.4bn in 2015. Almost half of these were below €20m.

Gaining a clearer view of credit risk

As mid-sized European companies become more comfortable issuing private debt, the market will further benefit from current initiatives to standardise documentation across Europe, and to implement common standards and best practice.

At present, investors are implementing their own due diligence processes and criteria where there is no consistent approach to assessing credit risk. This raises the cost of investment, and may put off many who might otherwise be keen to increase their exposure to the European mid-market. 

Therefore, a more consistent, comprehensive and wholly transparent analysis of credit risk would put these markets on a far firmer footing and help potential investors decide on the appropriate pricing and allocation of their capital, thereby opening up these markets to an even more diverse audience of investors.

As the private placement market is becoming both increasingly popular and more established, the time is right to consider implementing a more formal framework to assist investors with due diligence, documentation and analysis of credit risk.

While differences will remain between countries in terms of structure, documentation and risk appetite, streamlining the funding process by increasing transparency and providing a benchmark on creditworthiness would be a first step towards a more integrated European capital market. 

Alexandra Krief is director and head of mid-market evaluations at credit rating provider S&P Global Ratings