Irish firms raise billions via US private market

 

Ireland was the fourth-largest region for private placement issuances in 2003, writes Colleen Marie O'Connor, in New York

When the Republic's primary electric utility successfully raised more than a billion dollars in fresh capital through the US-based private placement market, more than an eyebrow was raised at the news.

It turns out an eye-popping $2.5 billion (€2 billion) was raised in 2003 by corporations based in Ireland, all from a private debt market not often cited in headlines.

Private placements are private bond transactions where deal terms are set in negotiations between the borrower - called an issuer - and the lender.

Deals are not registered with any government institution nor are they ever traded on a public bond market.

Private placements are executed through an arranger, or agent, and typically the issuer is not rated - one of the most distinct features of this market.

As the money invested stems primarily from US-based investors, issuers outside the US are referred to as "cross-border" transactions.

In addition, to the reported $1.0345 billion in financing for the ESB, last year's list of issuers from the Republic included a $650 million deal for Kerry Group, a $302 million deal for Greencore, and a $440 million deal for Bord Gáis, according to figures from the New York-based publication Private Placement Letter (PPL).

"And there is more growth potential for Ireland in 2004," said Mr Andrew Hanson, managing director and head of the private placement group at Merrill Lynch. "While Ireland hasn't been huge, traditionally, in the number of deals, 2003 was a big exception because of the size of the deals."

A leading agent in the private market, Merrill Lynch has executed transactions for Irish issuers by maintaining a presence in Dublin for years, notes Mr Hanson.

According to Merrill Lynch, Ireland was the fourth-largest region for private placement issuances in 2003, representing 7 per cent of total deal flow, a considerable accomplishment considering the UK - typically the busiest region of foreign issuance for private placements - represented 9 per cent of deal flow last year.

"Traditionally, Irish borrowers have been very prized by many investors," said Mr Jocelyn P Monk, managing director and global head of the Royal Bank of Scotland's (RBS) private placement group.

"For investors, I think most of their portfolio exposure to Ireland is significantly lower than they would like to see it," he said, explaining that the US and Ireland share similar practices with regards to corporate governance, law, accounting standards and business practices, making Irish companies very appealing.

According to PPL, RBS was the leading agent for private placements from Irish issuers last year, representing Kerry Group, Greencore and Bord Gáis. The ESB transaction - reportedly the second-largest private placement ever - was co-agented by ABN Amro and Barclays Capital.)

Royal Bank of Scotland has had a presence in Ireland for "decades through Ulster Bank, our subsidiary bank", said Mr Monk. Currently, Mr Monk's team is preparing to execute a private placement from an Irish-based corporation sometime in January 2004.

According to RBS, 10-15 Irish corporations have issued a private placement over the past decade. And like the Kerry Group, a so-called repeat issuer, about half are likely to return sometime soon. Why all the interest?

The private placement market has been humming along for more than 50 years in the US, but it has really been over the past three years that a plethora of European-based companies, such as those anchored in the Republic, have come to appreciate the long-term value from these highly negotiated transactions for a variety of reasons.

Private bond placements provide fresh capital for the refinancing of high interest debt, money for new acquisitions, or cash infusions for capital improvement projects, such as the construction of a new plant.

Furthermore, the market provides debt financing over seven, 10, 12, even 15-year terms, significantly longer than a line of credit from a bank.

Investors providing the funding mainly comprise US-based life insurance companies as well as pension funds and insurance funds - a pool of investors specifically looking for long- term capital commitments and ones that perform their own due diligence.

A formalised corporate debt rating is not a prerequisite for doing business in the private market.

"There's a very strong demand for a long-term, fixed-rate, relationship-based source of capital," said Ms Marie Fioramonti, managing director and head of PRICOA Capital Group, a leading investor in private placements.

The Eurobond market has been in disarray for the past year-and-a-half, the equity markets are much less predictable and accessible, and banks today have stronger concerns about credit exposure, Ms Fioramonti explained.

Over the past five years, PRICOA has invested over $300 million in Irish companies, and in 2004 is doubling the amount of money it's looking to invest in western European-based companies.

"There's a great deal of flexibility in the private finance market and that's a big plus. You're dealing with a limited number of investors, so companies can structure exactly the financing vehicle that they want; they may want to borrow in multiple currencies, they may want a partial amortizing structure, a partial bullet, or issue out of a couple of financial subsidiaries - all that can be done in this market," Ms Fioramonti said.

Prudential M&G, formed in 1997, is also an active investor in the private market but unique in that it is based in London.

With the equivalent of £2 billion sterling (€2.85 billion) invested across a portfolio of euro and sterling assets, the firm recently won mandates to invest in private placements from two UK pension funds.

"[Private placements] are the first step for many companies to diversify away from the bank market and who are unwilling or unable to tap the public bond market," said Mr Calum Macphail, director of the private finance group at Prudential M&G.

The opportunity to tap into low rates, coupled with financial prudence, was encouraging treasurers of many European companies to term out of borrowing, Mr Macphail noted.

Devoid of public reporting standards and offering a product not commonly touted by local financial institutions, the nuances of the private placement market once proved obscure to the European business audience.

It appears that the climate changed dramatically last year as more European companies took to issuing notes in the private market.

While exact figures are a bit hard to come by, due to a lack of reporting requirements, Banc of America Securities (BAS), the leading agent of overall private placements for the past six years, found that private placements for non-US issuers more than doubled in 2003.

According to Mr Greg Johnson, managing director at BAS, cross-border issuance reached nearly $26 billion last year, compared with $11 billion in 2002.

"Word has spread that these issuers discovered an accessible marketplace, dominated by sophisticated investors with long-term perspectives," said Mr Johnson.

"This explosive growth has been achieved both through a dramatic increase in the number of issuers - approximately 110 in 2003 compared to 57 in 2002 - as well as through a strong increase in the average deal size," Mr Johnson continued.

"US private placement portfolios have performed better than many of their public bond counterparts in the past couple of years, encouraging investors to increase allocations to this asset class and creating increasing appetite for such issues," he added.

However, while no type of industry dominates the market, a private placement isn't the right fit for every Irish entity.

If a company was hesitant about providing a detailed and complete description of its business and financial activities, it might not be suited for this market, Mr Johnson noted.

And although the market remains full of largely unrated issuers, companies need to be considered investment grade quality, the equivalent of a triple-B rating and above.

The author is managing editor of Private Placement Letter in New York