Bespoke Private Placements: An Alternative Source of Debt Funding in Europe

Typically, private placements are offerings by a borrower (the issuer) of securities which are not publicly traded and are sold to a select group of financiers (the investors). This article looks at a specific category of private placements, whereby bespoke funding is provided for particular projects or assets and is based on insights gained in our recent involvement in a large number of private placements across Europe. Such private placements may take the form of securities, loan notes or (LMA-based) credit agreements.

Increasingly popular

Over recent years, we have seen a significant increase in companies and sponsors expressing interest in using private placements to raise capital. In most cases, funds raised were used for specific (construction) projects or the acquisition of certain assets, e.g., vessels. Such private placements consist of medium to long-term structured financings provided by specialised investors (mostly institutional investors) who are able to offer terms tailored to the issuer’s specific needs.

Whilst the US private placement market is already an established form of funding with a total volume of over USD 100 billion in 2022, we are now also seeing developments in other markets, including the European market, with an issuance volume of around EUR 3.4 billion in 2022. In view of the upcoming refinancing wall in 2024/2025, we expect private placements to gain more foothold in Europe in the next few years.

Competitive pricing and longer maturities

Increased cost of long-term funding by regulated entities (such as commercial banks) is one of the reasons why private placements are becoming more favoured. A long-term funding arrangement combined with a fixed interest rate (although rates can also be floating) seems to be one of the main draws of private placements.

Maturities in private placements tend to be longer than what is seen in conventional commercial banking transactions. These are commonly between 5 and 35 years. Investors active in the private placement market generally aim to make investments giving them consistent returns for a longer period time, which matches their long-term liabilities vis-a-vis their stakeholders. On the other hand, issuers gain from the certainty of having long-term debt in place (whilst often also benefitting from lower interest rates). This can be particularly attractive in areas such as infrastructure finance, project finance, credit tenant leases, corporate finance and asset finance.

Diversification of capital structure

In the context of corporate financing, we increasingly see companies raising funds from multiple sources with the aim to reduce their reliance on a single source of funding. Private placements are a popular method of diversifying their capital structure, used as a supplement to conventional bank financing. We commonly see a long-term facility being made available by way of a private placement, whilst one or more commercial banks provide a revolving credit facility.

Investors

Private placements are generally the domain of institutional investors, including asset management firms, fund managers, and insurance companies. Geographically, we are seeing a wide variety of investors being active in the European market. These include investors from Canada, the US, the UK and continental European jurisdictions who are well-equipped to evaluate an issuer's creditworthiness, to provide sector-specific support to an issuer, and have the knowledge and ability to work with tailor-made documentation.

Role of the Arranger

The arranger plays a crucial role in private placements. They assist the issuer with the selection process, often running a competitive tender process. From the selection process up to the closing of the transaction, the arranger acts as a bridge between the investors and issuers, facilitating communication and negotiation. This helps to ensure that the terms of the investment are tailored to the needs of both sides, contributing to a smoother and more efficient process.

Private Placement Specific Terms

Make-whole Amount

Investors will typically need to offset their long-term liabilities with predictable, long-term investments, for example a pension fund needing to pay out retirement benefits over a long period of time to its members. As a result, investors will not wish to allow voluntary early repayment of the debt. It is generally agreed that the issuer will have to pay a “make-whole amount” if it wishes to make a voluntary prepayment. The make-whole call provision is a yield-maintenance provision and is designed to protect the investors from the loss of (interest) income resulting from the early voluntary repayment. Early repayment of debt is inconsistent with the principle of long-term predictability, and investors are typically not equipped to rapidly reinvest prepaid funds.

Fixed Drawdown Schedule

Parties often agree to a fixed drawdown schedule, which cuts down the need for investors to be involved at an operational level. A fixed drawdown schedule ensures that investors know when drawdowns will occur, allowing them to make sure well in advance that funding on their side is arranged properly. The degree of flexibility can be either an advantage or a disadvantage for the issuer, depending on the type of project or asset being financed. The administration of drawdowns is typically managed by a specialised agency services company acting as agent. If the financing is secured, such an agent will likely also act as a security agent.

Documentation

Private placements can take the form of securities (listed or unlisted) or loan notes, and may also be based on standard Loan Market Association (LMA) documentation, which is documentation created after extensive consultation with leading loan practitioners and law firms to represent an agreed common view of documentation structures. The LMA is widely regarded as the body that establishes guidelines for the EMEA syndicated loan market. In Europe, the LMA has published standard form bond documentation adapted for use in pan-European private placement (PEPP) transactions. In the US, the Notes Purchase Agreement (NPA) is commonly used as a basis. This is sometimes the case in European private placements involving US investors although in our experience most US investors may accept the use of LMA-based documentation as well. We more often see sector specific LMA documentation, such as the leverage or project finance LMA standard, being used. Such templates will be tailored to reflect the specific terms agreed between the parties. In our experience investors are indifferent to the type of documentation used as long as the agreed commercial terms and conditions are properly covered by external counsel.

Covenants

Private placements generally include terms which are similar to those in conventional bank financings. They will be adjusted to arrange for project-specific or asset-specific arrangements. The terms will need to provide investors with sufficient comfort whilst also protecting the issuer’s flexibility to manage its project and/or operations.

Outlook for 2024/2025

We see a bright future for bespoke private placements in the European market. Accessing medium- to long-term funding at a competitive interest rate is appealing to many companies and sponsors across various sectors. These private placements can be used as a substitute for commercial bank funding, or as a supplement to other sources of credit such as commercial bank funding, to diversify a company’s capital structure. Although private placement investors generally have some specific requirements, the terms of a bespoke private placement are in most cases not too dissimilar to a commercial bank financing.