New Year, New Potential For UK And European Private Placements

Author:Mr Maurice Allen, Brenda A. Coleman, Michael Kazakevich, W. Jane Rogers, Andrew Howard and Paola Bahari
Profession:Ropes & Gray LLP

Week two of the New Year marked a significant step in the development of the European Private Placement Market: The Loan Market Association (LMA) launched template documents for use in European private placement transactions. The development of standardized documentation will improve the visibility and perception of the product and might provide the European private placement market with the potential to grow, in time, into a notable competitor to the US market.

It has also been announced that a new exemption from UK withholding tax on interest on private placements will be introduced later in the year. HMRC are consulting on the conditions for exemption. Withholding tax exemption will provide a boost for the market, but some of the proposed conditions seem unduly restrictive.

The Product

Private placements are generally long-term financing transactions by way of notes or loans between companies and a relatively small number of select investors. Investors tend to be mutual funds, insurance companies, pensions funds and banks. Private placements offer an alternative source of funding from public bonds and bank loans. They offer competitive pricing and long-term funding, with longer tenures than bank loans. Private placements are also particularly attractive to companies that require funding but do not wish to have a formal credit rating or be subject to the reporting requirements of the public debt markets. From the investor's perspective, private placements permit diversification and long-term relationships as, in contrast to public bond issues, investors negotiate directly with the company and do their own due diligence.

With the reduction of bank lending as a result of the credit crisis, there is an increasing demand for non-bank funding, including private placements, as companies seek to diversify their sources of liquidity. In Europe, the most developed private placement market is the Schuldschein market in Germany. France has developed a smaller Euro private placement market. The UK private placement market is still at its early stages. A number of UK companies that have a demand for private placements prefer to turn to the most established private placement market - the US.

US Private Placements

The US private placement market has a long history and is successful. US private placements typically take the form of US dollar fixed-rate notes that do not require registration with the SEC. They are available to US and non-US companies and can also be issued with tranches in other currencies. Life insurers are the largest investors in the US private placement market as, among other reasons, they often prefer long-term fixed rate products to match long-term liabilities. They also have the sophistication to assess the credit quality of the issuer and negotiate the covenants.

NAIC Ratings

One of the many reasons for the growth of the US private placements market is the private rating given by the National Association of Insurance Commissioners (NAIC) to US private placement notes. Insurance companies are legally required to obtain the NAIC rating for the notes they buy. The private rating has also become a big feature of the investment appraisal process of non-insurers. This NAIC rating indicates the relative likelihood that the note will be repaid in accordance with its terms...

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