Debt Private Placements 101

August 20, 2016

Believe it or not, vanilla investment grade debt capital markets can still come in different flavors—you have your publicly traded debt, and then you have your privately placed, unregistered debt. We are talking about debt that is primarily sold to institutional investors (majority are insurance firms, asset managers, and pension funds) and is, in many cases, unrated by major credit agencies. The ~60 billion USD industry has become more attractive in recent years as a way for issuers to gain familiarity with the debt capital markets and for investors to diversify their debt holdings. Here is a quick 101 and day-in-the-life of an analyst in the debt private placements group (DP or “Private”).

 

 

 

 

What is Debt Private Placements?

 

Debt Private Placements (also sometimes called Private Capital Markets) sits under the broader investment grade debt capital markets and mostly works with companies that are BBB- (S&P, Fitch), Baa3 (Moody’s), NAIC-2 (National Association of Insurance Commissioners) and above. A majority of clients are in the triple-B range. However, the flexibility and targeted distribution strategies of the asset class also mean that some non-investment grade companies can be pitched to investors.

 

How is DP or “Private” pitched?

 

DPs are typically pitched in a similar way to broader DCM, using spreads, comparables, and general debt analysis. Distribution and execution obey supply and demand with institutional investors—the more a deal is oversubscribed, the greater the possibility of lowering the client’s coupon rate.

 

Why would a Client be interested in privately placed debt?

 

Clients see value in the privacy of a DP—these companies are typically inexperienced with the debt capital markets and DP is a way for a company to test the waters away from the prying eyes of public debt investors and gain familiarity/history with some institutional investors. Unrated clients would also be interested in DP because of better access to institutional investor capital and a chance to showcase their story. DP’s can also be strategic for certain industries. For instance, Real Estate Investment Trusts (REITs) use private placements as a means of transitioning from secured to unsecured types of debt. Finally, DPs can be used by clients to diversify their debt holdings at different maturities when needed.

 

A variety of good quality clients and issuers tap the private market every year, from major sports leagues to large manufacturers and infrastructure development companies.

 

DP clients are sourced through corporate banker referrals, coordinated pitches with the bank’s DCM groups, and pitches to regular clients who have previously done a debt deal.

 

Why would an Investor be interested in privately placed debt (considering that these types of debt are “risky” and illiquid)?

 

Investors see DP as a means of diversifying their portfolio and exposure to different kinds of companies and tenors. Since DPs are debt instruments that are not easily traded (coupled with the fact that some issuers do not have credit ratings), investors can typically command a slight premium for them although each bank will try to achieve spread parity with comparable bonds in the public markets.

 

Structure

 

DP within DCM tends to have leaner teams and a flatter organizational structure. As such, an analyst is typically assigned to managing director(s) to work on their pitches and deals. Junior bankers typically get staffed on 2 to 3 deals at a time, both local and cross-border.

 

Deal Types and Size

 

Analysts are generalists in DP and work on a broader range of deals than their counterparts in DCM. Deal assignments can range from large mining/energy companies to the most obscure liquor manufacturers. Deals themselves range from ~50M USD to ~1B USD. You will also get covenants that include leverage and coverage ratios, as well as restrictions on asset sales.

 

Challenges

 

The main challenge in the group lies in the pitching, credit analysis, and distribution, especially with issuers that may not have credit ratings. Strategies warrant a close business analysis to determine comparables and comparable credit ratings while constructing a cohesive story to entice investor demand.
 

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