The US Private Placement (USPP) market is attracting the interest of treasurers around the world as it continues to grow.
At the recent Private Placements Industry Forum in Miami, market followers agreed that 2017 had been a record year with US$64bn in agented volume. With five deals of over US$1bn and 14 above US$750m it was a remarkable twelve months, reflecting the longest equity rally for almost 100 years.
Figures suggest the deal count increased by ten percent year-on-year, reflecting a strong buy-side demand for both new and existing issuers. The average maturity was 13 years for a PP note, and energy and utility made up 35% of the volume while real estate was up to a 14% share of the market.
One of the big stories of 2017 has been the continued growth of infrastructure issuance since 2008. According to a report from the National Australia Bank (NAB), there were 72 infrastructure USPPs (non-power related) sold into the market from 2013 to 2017. Each of these would have been seen as critical assets to the countries they were set to serve.
The majority are massive undertakings costing billions of dollars, yet most consumers have little idea how they are funded. Whether it is the car you are driving built at a new plant and imported through a new port facility (which is transporting you to work over a new bridge to work at a new factory), or just the glass of water you may enjoy when you get there, it is unlikely you will be giving too much thought to how it all came about.
Interestingly, the UK and Australia are the largest non-US issuers in recent years and their interest in the market continues to grow as they look set to overhaul US issuer figures. These three countries lead the issuer market for good reasons. The UK is way ahead in the privatisation process and so existing infrastructure projects need refinancing as current loans come to an end.
Australia, albeit with a smaller population, is undergoing significant privatisation and modernisation. Some of the earlier projects are coming up for re-financing and thus an interest in the alternative funding that the USPP market offers.
Insofar as the US is concerned, Municipal Bonds finance many projects as they come under the aegis of the state involved. The growth in issuance in the USPP market is down to the sheer size of the country and the amount of money which needs to be raised to modernise infrastructure. This should mean the market will continue to attract interest.
Buy and hold
The success of placements over recent years has had something to do with the fall in confidence in the banks themselves. USPP investors often see their investment as a long-term buy and hold. Consequently, they take part in rigorous risk assessment and creditworthiness enquiries.
The size of their investments is significant too. Often bidders will be in the nine-figure area when attempting to snare an interest in a US$1bn note.
Although the market remains small compared with the public bond market, its flexibility makes it an attractive option for both issuers and investors. Typically, the market offers fixed-rate US$ debt for three to 15-year periods, although longer periods are visible. Pricing will be at a premium to the public bond market, reflecting the private nature of the instrument.
From an investor’s point of view, one advantage is the USPP normally boasts covenants similar to those in a company’s bank credit facility. The resilience of the market is evidenced in its performance since the financial crash, and this explains its recent growth and interest to investors.
There are also other aspects which attract investors. Whilst corporate bonds are almost always rated by the credit agencies, USPP are often not. This has led to assumptions that they are low grade and high risk. Nothing could be further from the truth. Many issuers in the USPP market are without doubt investment grade rated and often issue in the public bond market as well as the USPP equivalent.
Even issuers who are not rated are largely established corporations which, if they so decided, could be investment grade. This is reflected in the low-risk profile of USPP investors, for example the many insurance companies involved.
This year is expected to see continuing growth in the market and treasurers will be watching both issuance figures and investment in equal measure.
Simon Lynch is the owner of Treasury Talent.
Treasury Talent is a specialist treasury talent, recruitment and search provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact email@example.com