A nascent private bond market in France is expected to grow significantly over the next two years, and could ultimately take market share in Europe from U.S. banks and investors.
It could also complement, or possibly compete with, securitization of loans to small and medium-sized enterprises.
The French market began about a year ago and has raised nearly $8 billion for dairy, real estate development, information-technology and other corporations.
Banks have been deleveraging their balance sheet in Europe for years, creating a backlog of demand for credit among small and midsize businesses and leaving room for a U.S.- style private placement market to take root. Institutional investors have started to show a willingness to invest in deals, because of regulatory restrictions on banks, the search for yield and need to diversify their investments.
“Regulation and Basel III, at least in Europe, will help keep banks away, which means that the funding gap that’s appeared should be there for the long term,” said Steve Curry, one of the founding partners at Bishopsfield Capital, a structured finance boutique in London. “That’s always been institutional investors’ concern — you don’t want to get involved in things that can’t produce enough volume. Why bother if you’re always going to find yourself competing against banks, which often factor in relationship reasons to lend as well as pure economic reasons. I think there’s a belief that you’re starting to see a more level playing field for institutional investors.”
The market could spread across Europe and possibly involve larger companies as well.
“These are typically French companies for the time being, but also issuers from Belgium, Switzerland, Ireland, the Netherlands, Germany and Austria are interested,” said Mathias Choussy, debt portfolio manager at Fédéris Gestion d’Actifs, the asset management subsidiary of French insurance company Malakoff Médéric. “There are many issuers who are interested in coming, maybe later this year or next.”
The investor base for France’s burgeoning market is made up primarily of insurance companies. In addition to Malakoff Médéric, the main players include AXA IM and Allianz Investment Management (AIM Paris). But while only around five investors are participating on a regular basis, the number could grow quickly to as many as 10 in the near future, Choussy says.
Other market participants agree that interest in investing in private debt has jumped substantially among European institutional investors over the last year or so. And a recent report from Standard & Poor’s cites a resurgence among fund investors, such as Ares Capital and Amundi, in lending to smaller companies in Europe.
“The convergence is that institutional investors want exposure to credit, and they are providing an alternative source of financing to the banking market,” said Jason Russell, deputy head of the bond syndicate at Societe Generale. “It’s a good solution from that point of view.”
AIM stuck its toe into the water for the first time this year, and so far the firm has invested in four private placements in France, according to Olivier Fouchet, head of fixed income, tactical asset allocation, at AIM Paris. But don’t let the small number fool you — AIM plans to increase its allocation to the asset class significantly using a two-pronged strategy.
“Our ambition with the midcap segment is the French market, but depending on the market development we would want to invest in other countries like Italy, Spain and the U.K., for example,” Fouchet said. “I would say the emergence of a European market will happen, but it will take time.”
Before the second half of 2012, there was no coordinated private bond market to speak of in France. That changed in large part due to a fund set up by Fédéris and partner Kepler Capital Markets to invest directly in midcap corporate debt. Fédéris is the asset manager and anchor investor through its insurance parent company, and Kepler provides credit research on the names in the fund and advises Fédéris on structuring. It also markets the fund to third-party investors.
The partnership between Kepler and Fédéris grew out of the transaction for pharmaceutical company LFB, which Remy Savoya, executive director at Kepler, calls the first private placement in that market. The capital markets boutique originated a $67 million, seven-year bond for LFB, which was entirely placed with French insurance companies and other institutional investors.
“It was the first time these investors had done a private placement,” Savoya says. “We had discussions with U.S. private investors for a U.S. private placement, and we had discussions with a few German banks. There was appetite, but the client wasn’t convinced by the terms that were on offer. [LFB is] controlled by the French state, so we thought it was something we could do with French investors. It took a lot of time, but in the end they had a more comfortable view of the credit given the involvement of the state. … Otherwise, it would have been a U.S. private placement.”
Many obstacles to the creation of a pan-European private placement market exist — including disparate laws and inexperience on the buy side. No one thinks it will appear tomorrow. Moreover, what is happening in France is not a complete anomaly — market participants point out that direct deals (individual, bilateral private placements) have been done in the U.K. and continental Europe for quite some time, and a collective market has never materialized.
“When we launch a transaction into the U.S. private placement market, we will show it to the handful of sterling accounts that look at privates and also a similar number of European accounts, but it’s only a handful at present,” said David Cleary, co-head of U.S. private placements, at Lloyds Bank. “Currently you’ve not got the depth of liquidity, and a lot of the insurance companies haven’t got the market knowledge and systems as they don’t really have designated private placement teams like the U.S. firms have. So there are a few things holding the market back.”
“In the ideal world, we would have a fully functioning euro, sterling and U.S. market all with similar etiquettes, similar documentation and similar standards,” Cleary said. “My view is that we’re currently some way from that. If you are an investment-grade corporate in the U.K. or Eurozone, and require $100 million and above, to me the finest terms, price, liquidity, tenor and documentation are driven from the U.S. investor base.”
Indeed, at the moment the market in France is largely serving unrated small and midsize companies, the vast majority of which would fall into the “BB” and “BBB” category, participants say. And while U.S. private placement investors often say they will consider the BB category — the upper end of the subinvestment-grade market — getting one of these deals done here is normally a challenge.
The bonds’ maturities are different as well; maturities in the U.S. market are typically longer, starting at seven years and going all the way to 30.
For such reasons, Savoya sees France’s up-and-coming market as complementary to the U.S. version.
That said, if a large enough French or pan-European private placement market were to develop, French and other European issuers that currently depend on the U.S. private placement market could begin to seek more of their funding at home.
This would likely not please U.S. private placement investors, who depend on Europe for a good chunk of their allocations. Last year, more than 30% of the total invested in traditional private placements by U.S. investors went to U.K. and European issuers, according to annual Buyside Survey published by ASR’s sister publication, Private Placement Letter, French companies made up 5% of that, the second largest portion after the U.K.’s 13.9%.