The private debt market has grown by leaps and bounds since the great financial crisis, with new capital commitments raised reaching $166.3 billion globally in 2018. That’s a dramatic increase from just a few years ago – in 2010, following on the heels of the financial crisis, worldwide private debt fundraising amounted to $48.7 billion, according to Private Debt Investor data.
While this growth in fundraising mirrors the rise in fund manager-driven private debt origination, what is often overlooked is the tremendous growth of the private placement debt market. The private lending market continues to evolve and expand, and we have noticed in particular an increasing number of large corporate issuers, a rising proportion of investment-grade issuers and a greater geographic diversification across issuers.
The rise of multinational issuers
Once seen as a financing alternative primarily for middle-market borrowers, private placement debt is now becoming more widely used by multinational corporations. Large issuers are increasingly attracted to the private placement debt market for a number of reasons:
- It allows a corporation to diversify its capital structure and access a wider range of capital sources.
- A number of traditional bank lenders have curtailed their corporate lending in recent years in response to more stringent post-crisis capital requirements.
- Investors in private debt, which often include insurance companies, are more willing than banks to offer longer maturities, as they can match longer-term credits to the duration of their liabilities.
- Private placement debt can provide more flexibility in deal structures and terms – including delayed fundings, specific maturity lengths and multiple currencies – that enables a management team to customise the transaction to accomplish various strategic objectives with respect to the company’s capital structure.
- The private nature of such transactions also appeals to corporate issuers that need to maintain greater confidentiality than might be possible with public debt issuances.
Growth in investment-grade private debt
Along with the growing prevalence of larger corporate issuers, the private placement debt market is characterised by a higher amount of investment-grade issues. Unlike public corporate bonds, private placement debt is often unrated. However, because of the significant number of insurance company investors, private placement debt in the US is always assigned a credit quality designation from the National Association of Insurance Commissioners (NAIC) that is comparable to an agency rating. In recent years, most new-issue private placements have been either rated as investment grade or designated as such by the NAIC.
An increasingly global market
While investment-grade issues are rising, it is important for investors in private placement debt to stay vigilant in terms of deal structures, as the global economy continues to show signs of uncertainty. Investors in private placements have largely avoided the “covenant light” approaches seen among some participants in middle-market lending or more aggressive participants in the conventional bank loan market. However, investors should pay close attention to the composition of EBITDA, as issuers may have a tendency to define it in a self-serving way that may not hold up in the face of an economic downturn.
That said, it is important to emphasise that credit quality and deal structures in the private placement debt market have historically been very strong. According to a study of selected insurance investors by the Society of Actuaries, the annual economic loss rate for private placement debt was 0.20 percent in 2008 and 0.29 percent in 2009 – despite the impact of the financial crisis. Today’s private placement debt market is notable for being global in scope. While the majority of aggregate capital raised for private placement debt in 2018 was raised for North American issuers, roughly a third was raised for issuers outside of the US. The UK typically makes up anywhere from 15 percent to 30 percent of annual overall issuance.
There is also strong investor interest in other international markets, including Australia and New Zealand, Latin America (where investments in transportation and other infrastructure elements are especially prevalent), and to a lesser extent Asia (where aggressive lending by large banks has made private debt less viable).
Our experience at MetLife Investment Management is indicative of the growing global reach of private placement debt: in the first half of 2019, we invested more than $900 million in Australia, nearly $800 million in the UK and over $800 million in the broader Europe, Middle East and Africa (EMEA) region.
The private placement debt market shows no signs of contracting – and we believe there will continue to be both strong demand from issuers and a robust supply of capital from investors. This asset class offers investors attractive yields in today’s low interest rate environment, along with portfolio diversification and covenant structures similar to senior bank facilities. For issuers, the market provides access to capital, along with flexible deal structures and longer terms that align with borrowers’ strategic objectives.
John Wills, CFA, is global head of private placements at MetLife Investment Management