The new wave of alternative funding: offshore private placements

Transaction News

  • Share

Credit is still a challenge for some organisations with higher risk profiles, more challenging growth prospects and increased levels of gearing or previous signs of distress. To avoid being left behind as valuable opportunities emerge, organisations should consider the whole suite of funding alternatives including the US private placement market.

The local and offshore banking and investor community still sees Australasian corporate borrowers as attractive investment propositions relative to other markets, given our economic stability and the yields on offer. Globally, removing the ‘middleman’ in securing funding is a growing trend, with borrowers self-arranging a US issue to achieve better terms and conditions.

10 things you need to know about alternative funding:

1. The US private placement market

The US private placement market has consistently proved liquid despite recent volatile credit market conditions. Private placements are direct issues, typically with no underwriting or legal due diligence, with deals not registered or listed on an exchange.

This market is open to borrowers with investment grade characteristics; however there is no need for the company to provide a formal public rating.

2. Who are the investors?

The vast majority of investors in the US private placement markets are US insurance companies and pension funds seeking medium to long term maturity fixed income to match their liabilities.

3. Arranging fees for a lot less

In Australia and New Zealand, nearly all placements to US investors are ‘agented’ by banks, however now there is a market alternative. By self-arranging a US issue, borrowers can eliminate the need for an agent or bank. Commonly this is achieved with an advisor to assist with the preparation of transaction materials, strategy, process and pricing. This results in substantial bank arranging fee savings, as high as 50 points.

4. Tighter pricing

Companies who go direct to the investors and cut out the ‘middle man’ not only reduce fees, but also gain full visibility of market pricing. Agent banks may be motivated by wider pricing, making the transaction easier to oversubscribe and upsize. This pricing transparency ensures you are getting the best deal available.

5. Closer relationships, greater transparency

Self-arranging borrowers can build a direct relationship with providers of capital. Through closer direct relationships, borrowers can achieve tighter pricing and more bespoke terms from fewer investors, and can also facilitate efficient future raisings / refinancings.

6. Diversification

Increasing the diversification of a borrower’s funding source is a key advantage of the US private placements market. The market can be used to fund and extend refinancing or debt raising to meet the borrower’s strategic requirements. Diversifying lending relationships and spreading lending risk positions is a growing trend for borrowers globally. This ensures continued access to funding through volatile markets.

7. Improved financing tenure

Another advantage relative to bank financing is the improved tenure of the transaction. Transaction sizes range from $AU30m to over $AU1bn and maturities typically stretch from five years to 30 years.

8. Improved confidentiality and end investor group

Under a self-arranging process, issuers can select investors likely to have the strongest appetite, therefore reducing the final size of the investor group. A smaller investor group aids future flexibility and increases confidentiality. Non-disclosure agreements with selected investors also assist to ensure the wider market is not aware of the impending transaction.

9. Currency can be a risk

As issues are commonly denominated in USD, changes in market prices, such as foreign exchange rates or interest rates are factors borrowers need to carefully consider. Many companies hedge such issues with cross-currency swaps, which also have additional cost elements requiring consideration. AUD issuance is possible which removes some of the currency risk elements; however such issues may reduce investor demand.

10. Inflexibility can be an issue

Borrowers should note that US private placements do come with a “make whole” provision. Should the borrower wish to pay off the remaining debt early, a lump sum payment is required based on the financial obligations for the full term. Large investor numbers to an issue also can increase difficulty in implementing amendments to existing terms and conditions.

Organisations that adapt and successfully execute a capital management plan often find that they secure the required capital funding and also push boundaries in relation to the range of markets they can access and the innovative solutions they are able to explore. This can enable them to raise funding to support acquisitions, capital expenditure and expedite organic growth plans that did not previously seem possible.

Questions to ask yourself:

  • Is there visibility of the capabilities of your balance sheet in its current form and an agreed Capital Agenda?
  • Do you have the appropriate funding solutions in place to support your Capital Agenda?
  • Have you assessed all funding options available in the market to ensure that your arrangements support optimal growth? Alternative funding sources are important to consider if you are looking to strengthen access to markets and foster innovative solutions to growth.
    Have you assessed –
    • US, Canadian and Asian public and private debt capital markets?
    • Financing through emerging and new Asian banks entering the market?
    • Financing through loans and privately placed debt instruments with Australian institutional and superannuation?
    • Asset backed, leasing, trade and high yield debt solutions through non-bank financiers?
    • Global special situations, institutional, pension and distressed debt funds?