US Private Placements II

Why do US life insurance companies like USPPs?

US private placements provide incremental yield (estimated to be 15bps-50bps) compared to public bond issues with similar profiles, and they provide better covenant protection. They also improve portfolio diversification, both from a sector and geographic perspective. Of course, insurance companies and other institutional investors which want to participate in the US private placement market must have the requisite infrastructure to originate, evaluate and monitor transactions in their portfolio. This means resources to:

• Handle credit analyses and determine pricing
• Manage the legal aspects in order to document and close a transaction
• Provide on-going monitoring of each portfolio client
• Address any issues that might arise requiring amendments or restructurings during the life of a private placement
• Originate private placements

In general, they favour companies with “real” assets, predictable cash flows, limited risk of disruption, and strong management teams.

What is the process of issuing a USPP?

A private placement transaction is “born” when a company decides it wishes to obtain long term financing and does not wish to borrow from banks and does not view the public bond market as a viable alternative. Normally, the company will approach its relationship banks that have US private placement agent teams, in order to select one or more of these banks to act as a placement agent. The process for issuing a US private placement normally takes 10-12 weeks.

1. Once a private placement agent is selected by the company, the agent conducts due diligence. The PPM contains preliminary terms for the offering, e.g. maturity (or series of maturities), size, indicative covenants, etc. Concurrently with drafting the PPM, the Note Purchase Agreement – or “NPA” – is also drafted, which is the legal documentation for the private placement.  This first stage of the process normally takes three to four weeks
2. The PPM and draft NPA are then distributed to private placement investors, perhaps as many as 30 to 40, who review the documents and might have follow-up questions, which they address to the company through the placement agent
3. Two to three weeks following the distribution of the PPM (and - if relevant - following the road show), the agent takes bids from interested investors expressed as a spread over US Treasuries
4. The coupon is then fixed during a pricing call with the issuer, the placement agent, and investors, by adding the credit spread to the then-prevailing relevant US Treasury rate
5. Following pricing, we enter the final stage of the process, during which participating investors meet with the company to conduct due diligence, enabling them to obtain final sign-off at their respective credit committees for the transaction

What about European Private Placements?

European institutional investors, including insurance companies, asset managers and pension funds, have traditionally focused only on public bonds that are rated. However, after the 2008 financial crisis, continental European companies and investors – initially confined principally to France – began to look at the credit-intensive private placement market for smaller, un-rated companies. French companies, many of which were private middle market companies unable to issue in the public bond market, were looking for ways to diversify their funding away from volatile banks, and to raise longer-term Euro-denominated funding. From this start in France only a few years ago, the European private placement market has grown, becoming broader in its investor and issuer reach. In 2017, the volume of Euro private placements was around €7 billion.