The US private placement market has remained a significant source of capital for corporates and has remained open and active through the economic cycle in the US. It should come as little surprise therefore that many Irish companies have successfully raised funds through the US private placement market in recent times. These private placements involve the sale of securities to a relatively small number of investors such as large banks, mutual funds, insurance companies and pension funds. In many ways, it can be viewed as the polar opposite of a public offering in which securities are sold on the open market. | | Alan Duffy |
There is no shortage of capital available with 2012 turning out to be a record year for the private placement market with $54 billion capital supplied, marking a new high water mark for issuance. Early indications are that 2013 will turn out to be another record year with investors increasing their allocations. This is also leading to increased competition amongst investors to participate in deals - more good news for those wishing to raise funds.
The growing trend towards private placements on the part of Irish companies is due to a combination of factors including the constrained debt markets on this side of the Atlantic and depressed equity values. However, there are other far more positive underlying dynamics at work here as well.
The first is the relative simplicity of a private placing as opposed to other forms of large capital raising exercises. Because a private placement is offered only to a relatively small number of investors it doesn’t necessarily have to be registered with the US Securities and Exchange Commission. This can often mean that detailed financial information is not subject to public disclosure and there is no consequent requirement for a prospectus.
Another advantage is the longer term nature of the funding on offer. Many investors in private placement issues are looking for reasonably high yields and these are simply not available from shorter term instruments without an unacceptably high level of risk - and risk aversion remains another strong facet of investor sentiment at present. There is no shortage of capital available with 2012 turning out to be a record year for the private placement market with $54 billion capital supplied, marking a new high water mark for issuance. Early indications are that 2013 will turn out to be another record year with investors increasing their allocations. This is also leading to increased competition amongst investors to participate in deals - more good news for those wishing to raise funds
For example, throughout the first half of 2012, risk aversion increased demand for safe haven assets driving US Treasury yields to an all-time low in late July with 10 year bond yields hitting 1.39% while gold remained exceptionally strong throughout this period. While the brighter economic news of the second half of the year coupled with political events such as the avoidance of the so called “fiscal cliff” in the US have increased spreads since then, 10 year Treasury yields remain stubbornly low at around 2%. This has left the coupon for placement issuers near historic lows as well.
This is welcome news for companies looking to raise capital on the private placement markets. The low coupon rates have increased investors’ desire to look for longer dated issuances to drive additional yield. This means that while 10 year maturities which most closely match investors’ insurance liabilities continue to account for the largest slice of the private placement market, volumes of 12 years and longer account for 35% of issuances for the year to date. Five year maturities are only of limited interest due to their relatively lower coupon yields for issuers.
Creditworthiness for private placements is assessed by the National Association of Insurance Commissioners (NAIC) in the US. The NAIC tends to be more than a little opaque in terms of its grading methodologies but they are closely followed nonetheless. As it is anticipated that they will soon begin to assign +/=/- ratings to their existing number based categorisation, investors will be watching that space closely over the next 12 months, as it becomes a sensitive subject when it impacts their returns.
Right now, perhaps unsurprisingly, the market remains focussed on stable, investment grade credits. Hence the longer maturities in the search for higher yield. There is some selective appetite for slightly higher risk credits as investors search for enhanced yields but this is quite limited.
This is also creating a thirst among investors for additional supply from issuers and, very importantly, they are looking for greater size and new names. This will provide opportunities for Irish corporates which have not previously looked in this direction for capital. In fact, a lack of supply may be the only potentially constraining factor in 2013. Investors clearly have the money to put to work and it is only a question of putting the right offers in front of them.
From an Irish perspective the demand for diversity in the market is another positive. The requirement for portfolio diversification means that the cross-border transactions account for the majority of new issuances and with US investors being generally quite favourable toward Irish firms, the climate is certainly a good one. |
