There are significant opportunities available to corporates across the financing spectrum today. While companies have capitalized on the low-cost borrowing available in the global public bond markets by financing acquisitions, diversifying funding sources, refinancing debt and conducting liability management transactions (see - Corporate Corner: Despite Modest Rise in Leverage, Corporates Remain Well Placed to Navigate and Capitalize on Volatile Market Backdrop), investment grade loans and private placements also continue to be important areas of capital markets activity for corporate clients.
With all the talk and headlines of bank regulation crimping lending, the investment grade loan market remains healthy and is benefitting from lower transaction volumes. Corporates function a great deal like individual households in that most financing decisions are made out of either greed or fear. On the greed front, the slowdown of mergers and acquisitions has resulted in fewer “new money” transactions to support this activity. Despite several years of warnings on how financial regulation will impinge the ability and willingness of banks to lend, there have been no material changes in pricing or tenor availability in the investment grade syndicated loan markets for revolvers over the last two years. As a result, there is very little fear that the market will deteriorate significantly at the same time that there is no pricing benefit (greed) to refinance. While more capital intensive companies continue to amend and extend facilities – a process whereby a corporate prematurely extends the tenor of the facility to a fresh five-year maturity date rather than waiting further into the life of the facility to refinance – there has been a slowdown in early renewal activity. Even with this healthy report card and related decision making by corporates, there remains warning signs on the horizon.
To use a baseball analogy, we are still somewhere in the middle innings in terms of the adoption and implementation of financial regulation. For example, there has been an impact from regulation on the appetite for funded bank debt (drawn revolvers and term loans). This is the one area of the loan market where we have seen banks’ preference to shorten tenor – on term loans to three-years or less, compared with five-years for unfunded revolvers – and impose increased pricing to offset the higher capital requirements instituted by regulators. To be fair, for every example of a term loan syndication that has struggled in terms of tenor or price we have a counter-example of strong execution. Bank capital obviously remains a central building block of the capital structure for corporates, and the pricing and availability will be keenly monitored as we move into the later innings of regulatory compliance requirements.
For obvious reasons, the U.S. private placement market remains the less well discussed or reported upon debt market. In a nutshell, the U.S. private placement bond market is simply a bond market where the securities are not registered with the SEC, the issuers tend to carry investment grade credit profiles – but having ratings from Moody’s and S&P are not required – and the primary investors are U.S. life insurance companies. While issuers in this market are often required to give more specific and restrictive covenants than what is required in the public bond markets, these covenants are often reasonable from an operating flexibility standpoint and no more restrictive than what the issuer has already provided to banks to attain credit facilities.
There are several key benefits for corporates, even those with ratings and access to the public bond markets, to issue or consider private placements. First, the private market is far more flexible in terms of size and tranching. There really is no minimal deal size requirement in the private market and transactions can be split into numerous maturities to allow for smoothing of liabilities. Next, private investors are willing to provide a delay-draw mechanism whereby all parties commit to the terms of the offering, but the issuer does not take proceeds for a period of time. This is an excellent way for an issuer to avoid incurring negative carry, while obviously avoiding the risk of not having secured necessary financing. As a matter of course, private placement investors have provided up to three months of delay for free and have recently provided delays of as long as fifteen months for minimal costs, particularly when compared to prevailing forward rate projections. Additionally, issuers who have non-dollar financing requirements can source these funds directly via a private placement from U.S. life insurance investors, who will provide funds in the desired currency. Not all issuers have a large enough financing requirement or net investment hedge capacity to warrant going to the public debt markets internationally, where typical debut issuance size is roughly 500 million in Euros or Sterling. Finally, there are incremental costs, documentation and marketing requirements to doing a public debt issuance that can be avoided by using the private market.
Although the public debt markets often get a lot of media coverage due to the size of the market and its profile in providing liquidity to newsworthy M&A activity, we wanted to emphasize some of the other equally critical markets in the financing continuum that corporates are utilizing. Mizuho is well placed to provide strategic advice as well as execution without bias to market because of our industry position in debt capital markets, syndicated loans and private placements.
This document is NOT a research report under the legal requirements in any country or jurisdiction designed to promote the independence of investment research and is NOT a product of a fixed income research department. This document has been prepared for institutional clients, sophisticated investors and market professionals only, on the basis of publicly available information. This communication has been produced by and for the primary benefit of a syndicate desk. It is not investment research nor considered impartial in relation to the activities of this syndicate desk.