11 Reasons to Issue a Private Placement
September 10, 2019
There are a variety of reasons why companies might choose to issue in the private placement market, these are our top 11.
Issuing in the private placement market offers companies a variety of advantages, including maintaining confidentiality, accessing long-term, fixed-rate capital, diversifying financing sources and creating additional financing capacity.
One of the most common questions we hear from CEOs and CFOs is, “Why would I issue a private placement?” A private placement is a method for both public and private companies to raise capital through the private sale of corporate debt or equity securities, to a limited number of qualified investors (aka lenders); it is an alternative to traditional capital sources, such as bank debt, or issuing securities on the public bond market.
Here are our top 11 reasons to issue a private placement:
- Privacy and Control – Private placements enable companies that value privacy to remain private. In contrast to public debt and equity offerings – which require public filings, disclosures of company information and financing documents and terms – private placement transactions are negotiated confidentially, and public disclosure requirements are limited. With a private placement, companies would not be beholden to public shareholders.
- Long Maturities – Private placements provide longer maturities than typical bank financing arrangements. They are ideal for companies seeking to extend or layer their refinancing obligations out beyond the typical 3-5-year bank tenor. Additionally, longer maturities often allow for limited amortization, which can be attractive to companies seeking to invest in capital assets, acquisitions and/or invest in projects that have a longer investment return runway.
- Fixed Rate – Typically, private placements are offered at a fixed-interest rate, minimizing interest rate risk. Through a fixed-rate financing, companies can avoid the concern commonly associated with floating-rate coupons, should underlying interest rates rise. A fixed coupon generally allows companies to allocate the cost of debt capital for specific project financings, acquisitions or large capital investment programs.
"Creating capital access in both the private debt and bank markets can allow companies to optimize their access to debt capital."
- Diversify Capital Sources – Private placements help diversify a company’s sources of capital and capital structure. The stable investment appetite shown by insurance companies and other large institutional investors in the private placement market is typically independent from many of the market variables that impact bank market lending activity. Since the terms of private placements can be customized, these transactions are typically crafted to complement existing bank credit facility capacity as opposed to directly competing with these relationships. Creating capital access in both the private debt and bank markets can allow companies to optimize their access to debt capital. Diversification of financing sources becomes particularly important during market cycles when bank liquidity may be tight.
- Additional Capacity – Many companies issue private placements because they have outgrown their borrowing capacity and need capital beyond what their existing lenders (banks, private equity firms, etc.) can provide. Private placements typically focus on cash flow lending metrics and can be completed on either a secured or unsecured basis, depending on the issuer’s existing capital structure.
- Buy-and-Hold – Private placements are typically "buy-and-hold," meaning the debt investment wouldn’t be purchased with the intent to sell to another investor. Thus, private placement borrowers benefit from the ability to create a long-term relationship with the same investor throughout the life of the financing.
- Ease of Execution – Private placement financings are regularly completed by both privately-held, middle-market companies as well as large public companies. These transactions provide issuers with access to capital on a scale that rivals underwritten public debt offerings, but without certain preconditional requirements, such as ratings, public registrations or minimum size restrictions. For public companies, private placements can offer superior execution relative to the public market for small issuance sizes as well as greater structural flexibility.
- Cost Savings – A company can often issue a private placement for a much lower all-in cost than it could in a public offering. For public issuers, the Security and Exchange Commission (SEC) related registration, legal documentation and underwriting fees for a public offering can be expensive. Additionally, in contrast to banks that often rely on ancillary services and fee generation to enhance investment return, private placement lenders rely exclusively on the yield from the notes that they purchase. Taking into consideration the yield-equivalent savings on avoided underwriting fees, in conjunction with the yield premium often associated with first time issuers and small issuance premiums, private placements can provide a very attractive alternative to the public debt market.
"In many cases, private placements are completed with a single large institutional investor."
- Fewer Investors – Unlike issuing securities on the public market, where companies issuing debt securities often deal with hundreds of investors, private placement transactions typically involve fewer than 10-20 investors, and in many cases, are completed with a single large institutional investor. This approach can materially simplify the investor tracking burden for issuers as well as allow them to concentrate their investor-relationship efforts on a few key financial partners.
- Familiar Pricing Process – The process for pricing private placements debt transactions is very similar to that of public securities. The coupon set for fixed-rate notes issued reflects the underlying U.S. Treasury rate corresponding to the tenor of the notes issued, plus a credit risk premium (a “credit spread”). This process allows for general transparency as to the approach that institutional investors undertake when establishing the economics of the transaction.
- Speed of Execution – The growth and maturity of the private placement market has led to improved standardization of documentation, visibility of pricing and terms as well as increased capacity for financings. As a result, the private market can accommodate transactions as small as $10 million and as large as $1-$2 billion. That, when combined with standardized documentation and a smaller universe of investors, fosters quick execution of an investment, generally within 6-8 weeks (for an initial transaction, with follow-on financings executed within a shorter time frame). As noted, it can be much faster to issue a private placement versus a public corporate bond (particularly for first-time issuers) due to the elimination of prospectus drafting, rating agency diligence and registering requirements with the SEC.
Publish Date: September 10, 2019
This Article Represents The Views, Opinions And Recommendations Of The Author(S) Regarding The Economic Conditions, Asset Classes, Securities, Issuers Or Financial Instruments Referenced Herein. Distribution Of This Information To Any Person Other Than The Person To Whom It Was Originally Delivered Is Unauthorised, And Any Reproduction Of These Materials, In Whole Or In Part, Or The Divulgence Of Any Of The Contents Hereof, Without Prior Consent Of Prudential Private Capital Is Prohibited. Certain Information Contained Herein Has Been Obtained From Sources That Prudential Private Capital Believes To Be Reliable As Of The Date Presented; However, Prudential Private Capital Cannot Guarantee The Accuracy Of Such Information, Assure Its Completeness, Or Warrant Such Information Will Not Be Changed. The Information Contained Herein Is Current As Of The Date Of Issuance (Or Such Earlier Date As Referenced Herein) And Is Subject To Change Without Notice. Prudential Private Capital Has No Obligation To Update Any Or All Of Such Information; Nor Do We Make Any Express Or Implied Warranties Or Representations As To The Completeness Or Accuracy Or Accept Responsibility For Errors. These Materials Are Not Intended As An Offer Or Solicitation With Respect To The Purchase Or Sale Of Any Security Or Other Financial Instrument Or Any Investment Management Services And Should Not Be Used As The Basis For Any Investment Decision. Past Performance Is No Guarantee Or Reliable Indicator Of Future Results. No Liability Whatsoever Is Accepted For Any Loss (Whether Direct, Indirect, Or Consequential) That May Arise From Any Use Of The Information Contained In Or Derived From This Report. Prudential Private Capital And Its Affiliates May Make Investment Decisions That Are Inconsistent With The Recommendations Or Views Expressed Herein, Including For Proprietary Accounts Of Prudential Private Capital Or Its Affiliates.
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