The rise of private placements as an alternative source of funding: a time for innovation and growth


Financier Worldwide Magazine

March 2016 Issue

March 2016 Issue

During 2015, the European market saw a weakening in performance across the large cap loan and bond markets as a consequence of ongoing macro concerns, choppy equity markets and oil price volatility. These market conditions have locked distressed companies out of the bond market and have pushed investment grade companies to turn to the private placement markets.

Traditionally a form of US financing provided by US insurance companies and pension funds for decades in the US, this is increasingly being used in Europe. Importantly, the private placement market has remained open throughout the recent financial crisis.

So what are private placements?

In the absence of a formalised definition, there has been some debate in the market as to what constitutes a private placement. Ordinarily, a private placement (PP) as the name suggests involves a placement of debt – often in the form of bonds or notes – with a small group of selected investors, often non-banking institutions. These transactions offer a number of real advantages, not least that they are cheaper and quicker to structure than bond market issues and they offer good medium to long term yields, which are attractive to pension funds and insurance companies.

The US has long benefited from an active PP market, where companies can raise finance by offering a small group of investors a chance to invest in debt, which does not involve the cumbersome process of public transactions as the securities are not offered to the public. The deals are placed directly with the investors or, in some cases, placed with a single investor; therefore, the agents involved are not underwriters and they do not purchase the bonds themselves.

Is Europe playing catch-up?

In the European market, PPs are debt products that are not required to be listed on public markets or rated and can be structured either as securities or loans. Typically these are loans lent by, or notes subscribed by, one or two lenders/subscribers – usually alternative credit providers. The European market is fragmented, with each jurisdiction having its own form of PP financing, although the issuance of Loan Market Association PP documentation has gone a long way towards achieving market standardisation.

During 2015, we saw the use of English law PP for financings in other European jurisdictions such as France, Italy and Spain. This was partly driven by the increased use of schemes of arrangement in these jurisdictions as well as by US and English direct lending funds wishing to lend ‘safely’ into Europe via English law.

Who are the private placement debt providers?

The categories of investors that generally provide this type of financing are institutional investors and, in some cases, high net worth individuals and other significant large corporate investors. Institutional investors like PPs because they tend to be longer-dated than bank loans, and quicker to issue than publicly traded bonds, and they usually carry a slightly higher coupon than either. The longer tenors match the investors’ long-term liabilities in pensions and savings.

Who can invest?

Traditionally, private placements were a form of financing geared at mid-cap companies that could not access the public markets where the minimum size of the transaction is around US$300m. The PP market allows for significant flexibility in issue size, with issuances ranging from as little as US$20m to as much as US$1bn for strong issuers. In Europe, as the PP market developed, the profile of the issuers in this market tends to range from midcap to larger corporates. 2015 saw large public issuers and companies in the FTSE 100 accessing the market because of its expeditious timeframe and much lower cost structure than any public transactions.

The advantages of a PP

The principal advantages ascribed to private placements are lower transaction costs and shorter time-to-market timeframes because there is no requirement to produce a prospectus or comply with other investor protection rules. Without this, transaction costs are greatly reduced and private placements can be carried out in a much shorter timeframe. This makes them particularly attractive to companies that wish to raise funds quickly or sophisticated capital markets issuers wishing to transact in short timeframes. Direct contact between the issuer and the investors allows for the tailoring of products to the requirements of a specific investor or group of investors.

From a borrower’s perspective, PPs are a good product for companies with steady revenue streams or assets they need to finance. There is typically no commitment fee and the coupon is usually fixed. Recent private placements contain a delayed drawdown feature that allows borrowers to have six-week to two-month settlement periods, or to have several closings. This can be advantageous for treasurers if they do not require debt straight away but they want to have funding commitment and lock down the interest. It also removes the need for hedging arrangements.

Tax structuring

There are still hurdles to overcome in this regard before the pan-European market functions properly. The regulatory backdrop is being finalised, and no agreement has been reached so far on tax harmonisation and common insolvency rules.

The UK now has an exemption to withholding tax on privately placed debt. Regulations came into effect on 1 January 2016. A PP for exemption purposes is broadly a security (which includes for these purposes bilateral loans and other loan-type arrangements) with a term of not more than 50 years and a minimum value of £10m, which represents a loan relationship to which a company is a party as debtor, which is not listed on a recognised stock exchange, and whereby the debtor and each creditor are not connected. The exemption applies to new as well as existing private placement structures.

Standardising European documentation

In the European context, during 2015 issuers have largely used the template documents launched by the LMA. These include a loan agreement that is also capable of being evidenced as a note. It is based on the existing LMA term facility agreement for use in investment grade transactions. While the template is governed by English law, unsecured and aimed primarily at investment grade borrowers, the documents are drafted so that they can be easily adapted to other governing laws and market sectors, and can be tailored for a whole range of borrowers. The template documents also include a precedent subscription agreement, a term sheet and a confidentiality agreement.

For European issuers, in particular issuers in jurisdictions such as France and Italy (where credit funds can only lend via bonds and not loans), the documentation would ordinarily comprise a subscription agreement often attaching standard terms and conditions.

In conclusion – the road ahead

As alternative credit providers increase their share of the European debt market, European issuers will increasingly use private placements via LMA standard documentation, rather than looking across the Atlantic as they have increasingly done in recent years.

As a result, 2016 will be the year when English law private placements become a staple tool for financings in the European market and will entrench the role of alternative credit providers in the market.


Monica Dupont-Barton and Ranajoy Basu are partners at Reed Smith. Ms Dupont-Barton can be contacted on +44 (0)20 3116 3597 or by email: Mr Basu can be contacted on +44 (0)20 3116 2827 or by email:

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Monica Dupont-Barton and Ranajoy Basu

Reed Smith

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