| Irish corporates remain attracted to US private placement market |
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By: Brendan McGrath, Brendan McGrath
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| Irish corporates looking to restructure their balance sheet into longer maturities, or who are gearing up for acquisition or major capital investment would be well advised to look at the US private placement market, writes Brendan McGrath, where a slew of corporates including Kerry Group, Kingspan and the Quinn Group have recently raised funds. |
What have Kerry Group, Bord Gais, Greencore, the ESB, DCC, United Drug. Grafton Group, Kingspan Group, the Quinn Group and Irish Food Processors got in common – apart from two of them being based in Cavan!
Answer – collectively they have within the past four years raised more than $3.75 billion between them on the US private placement market, and two of the most recent deals – a $200 million issue by Kingspan and a $325 million issue by Grafton - were arranged by Bank of Ireland Corporate Banking and Macquarie Securities (USA) Inc.
Not only did Grafton and Kingspan discover a new source of long-term debt finance but they also raised their funds at some of the tightest spreads over US treasuries ever achieved in the US private placement market.
‘In the private placement market, at least, water can still be squeezed out of stone,’ commented Investment Dealers Digest on the Kingspan deal. And on Grafton’s heavily over-subscribed $325 million placement, Private Placement Letter commented, ‘Many market participants were surprised to see that the issue was completed at spreads inside of public comparables in the building materials sector.’
So what makes the US private placement market such an attractive source of funding for Irish corporates who either want to restructure their borrowings over much longer maturities than they could otherwise obtain - up to 30 years compared to maybe seven years on the normal debt market - or who want to gear up for substantial acquisitions?
Public companies, of course, always had the option of equity funding – but share issues can be time-consuming, expensive and earnings-diluting – at least when compared with the cost of alternative funding on markets such as the US private placement market. The corporate could also do a US bond issue. But again this is a relatively cumbersome and expensive instrument requiring SEC registration, credit ratings from S&P and Moody’s along with preparation of a detailed prospectus which would have a wide distribution.
In contrast, a private placement is exactly what it says in the title – it is private. It does not require SEC registration, S&P and Moody’s ratings are optional, it has no minimum size (unlike the minimum $400 million of a public or ‘yankee’ bond issue). There is no public prospectus - all the issuer needs to produce is a confidential memorandum whose distribution can be restricted to a relatively small pool of potential investors.
And who are those investors who invest in private placements?
Overwhelmingly, they are drawn from the ranks of the major US insurance companies with banks and other institutions making up the balance.
These investors are very much relationship-driven – ‘they wanted to see the whites of our eyes,’ as one company executive commented on the roadshow to promote his placement. They normally buy and hold their investments to full maturity, they typically invest from $5 million to more than $200 million per deal, they have an appetite for both investment and non-investment grade paper and they have a large appetite for long-term lending across a range of industry sectors. Liquidity in the market is very strong with average annual issues of some $30 billion.
The US private placement market also has the attraction of being long-established. A European market based on the euro is still pretty much in its infancy while sterling private placements tend to be the preserve of major US institutions with sterling funds to invest. In any event, it is typically cheaper to raise private placement funds in the US market and then swap the proceeds into euro through a swap auction.
What sort of companies are attractive to US private placement investors? In the past year, the most active sectors have been food and drink, energy and utilities, consumer products, industrial manufacturing, financial services, infrastructure, construction services and materials, aerospace and defence and chemicals. A large number of Irish companies, which could benefit from private placement fundraising, fall into these very sectors.
The private placement market also offers the opportunity to tailor transaction structures to suit individual corporate requirements. The issue size can be anything from $25 million to $1 billion, it can be secured or unsecured, maturities can vary from three to 30 years although the majority of deals would be in the middle of that range. In addition, the issue can be divided into multiple tranches with a range of maturities, while interest rates can be fixed or floating.
According to Bank of Ireland Corporate Banking’s Pat Gaynor, managing director of Corporate Banking Ireland, ‘A US private placement is a complimentary rather than replacement product to traditional bank debt and they operate very successfully ‘hand in hand’ with each other. The only element that a prospective private issuer needs to be wary of is that the investors invariably want to see the issue through to maturity and do not welcome approaches for the early redemption of the issue or changes in the covenants. Reflecting this desire by investors, private placement documentation typically contains a ‘make whole provision’ under which the Issuer is required to make up the difference between US Treasuries and the coupon on the private placement up to the full maturity of the issue’.
Roadshows for private placement issues will also certainly build up the air miles. A good number of potential lead investors are in the traditional financial heartland in the north-east and many will expect one-on-one presentations, while smaller investors will be happy with a group presentation.
Once the dollars have been raised from a private placement then the Irish corporate will want to swap these into euro – usually through a swap auction. – and in the case of the deal Bank of Ireland and Macquarie put together for Kingspan, the $200 million raised at a coupon between 88 and 95bp over 10 and 12 years.
So far, ten Irish organisations – six public companies, two large privately-owned companies and two large public utilities have successfully tapped the US private placement market. All have benefited by being able to tap into a highly liquid market which offers secure long-term funding – at spreads they could not have contemplated through other sources of funding.
In the United States, there is a large number of insurance companies and banks that are keen to provide that low-cost long-term funding to companies which meet their investment criteria. Bank of Ireland and Macquarie Securities (USA) Inc believe that, given the hugely positive response to recent private placements such as Kingspan and Grafton, there is a strong demand from US insurers for other quality Irish investments.
Irish corporates looking to restructure their balance sheet into longer maturities or who are gearing up for acquisition or major capital investment would be well advised to look at the US private placement market. |
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