• New Routes to Raising Finance

     

     

    Bank funding conditions are strong for UK mid-caps, with banks typically looking to lend more than corporate clients are looking to borrow. But as businesses seek to diversify, so Treasurers must diversify too. DAVID CLEARY, Senior Director, Corporate Debt Capital Markets, Lloyds Bank, analyses these funding trends.

    A continuing focus on diversification has led many UK companies to consider alternative sources of funding. A number of different funding sources fall under this umbrella, but particularly for unrated companies the two markets that are of interest are the retail bond and private placement markets.

    PRIVATE PLACEMENTS

    Where US private placements (USPP) are concerned, this has been a good year for UK companies. Despite the ongoing issues in the Eurozone, US-based investors are still willing to lend to UK plc, and so far there has been $8bn of issuance by UK corporates in this market. The market as a whole is on track for a record year, with the year to date $50bn already exceeding last year’s total figure of $45bn. Pricing is competitive in most cases and we are seeing no let-up in demand from investors. (Source: Lloyds Securities Inc)

    We have also seen an increase in deal size compared to last year: in 2011 the average deal size was $235m, whereas this year it currently stands at $325m. Overall the trend has been towards a smaller number of issuers issuing bigger deals, as we saw with the $753m issuance that we recently priced for the packaging company Rexam.

    Aside from diversification, another factor attracting UK issuers to this market is the fact that the unsecured bank lending market typically has a debt maturity maximum tenor of five years. In comparison, 75% of USPPs have a final maturity of between seven and 12 years, with the majority coming in at around ten years. (Source: Lloyds Securities Inc)

    Companies issuing USPPs tend to fall into a number of camps. Firstly there are those that require long dated sterling but see the market as an efficient method of raising debt so they issue in dollars and Lloyds Bank swaps the proceeds back to sterling for them. There are also companies that have a need for dollars, so a USPP issuance gives them a natural hedge against their revenues and assets balance sheet. Whatever the currency requirement, the USPP market provides issuers with a low cost and efficient method of accessing the debt capital markets without the need to obtain a public credit rating.

    For UK companies looking at private placements, the emphasis is very much on the pool of liquidity in the US. While a UK private placement market does exist, the number of investors in this market is very small, and companies looking to raise funds are likely to get the best execution and cheaper terms in the US. However, this could change in time: following the publication of the Breedon Report on Alternative Finance in March, banks are currently working with the Association of Corporate Treasurers and market participants to try to establish a larger UK market with liquidity provided by a greater number of investors.
     

    UK RETAIL BOND MARKET

    While the USPP market is an established funding source for UK issuers, a more recent newcomer is the UK retail bond market. This market was effectively created when the London Stock Exchange introduced the Order book for Retail Bonds (ORB) system in February 2010. Since then, the market has taken off well: total issuance to date stands at almost £3bn.(Source: Lloyds Bank)

    Like the USPP market, the search for diversification is proving a significant driver for companies accessing the retail bond market. Flattening the spikes in the debt maturity profile is another goal and companies using the retail bond market are often planning on repeat issuance of £50–100m every 9–24 months(source: Lloyds Bank), thereby avoiding the maturity spike that would arise if they were to issue a larger bond in the institutional market every five years. Retail bond tenors typically fall between six and eight years, with the longest deals reaching ten years. Pricing in this market has historically been at or above 5% but the recent Lloyds Bank led issue by the London Stock Exchange saw this coupon floor broken as it successfully issued for nine years at 4.75%.
     

    CHOOSING THE RIGHT FUNDING SOURCE

    USPP and UK retail bonds are both enjoying attention from UK issuers, although there are differences between the two markets. The long-established USPP market prices over the US Treasury and US public companies and whilst pricing and terms move over time, the market is always open and the documentation fairly standardised. The UK’s retail bond market, on the other hand, is much less tested and public documentation and disclosure can be daunting for debut issuers.

    Other factors will play a part in determining which funding source is appropriate for a particular company. While unrated companies can issue in the USPP market, issuers do need to have investment grade credit metrics: their net debt to EBITDA needs to be less than three, for example.

     

    On balance, a strong corporate with an investment grade balance sheet, looking to raise £100m to £200m and comfortable providing financial covenants to investors, would probably choose the USPP market because the pricing will be lower. On the other hand, a UK company which is unwilling to provide covenants, seeks a slightly smaller sum and is possibly slightly smaller or more levered probably won’t be able to access the private placement market – but the retail bond market could be an attractive option.
     

    FUTURE PROSPECTS

    It’s an interesting time in the world of funding. Banks are generally under-lent, so they have balance sheet that they are looking to put to work for their corporate clients. The private placement market is very keen to invest in UK and northern European names – as well as those in the US – and the UK’s retail bond market is growing and attracting strong interest from finance teams. In the meantime, public markets continue apace.


    Another factor is the Funding for Lending Scheme, which enables British banks to offer core debt facilities to their corporate clients at a lower margin. My view is that the breakdown of around 60% funding in the loan market and 40% funding in the non-bank market will broadly continue, but there will be some variations as the Funding for Lending Scheme gets going.

     

    In the retail bond market there is a strong pipeline in the coming six months and we are expecting to see significant issuance volumes in that timeframe. Meanwhile, there is every reason to believe that the private placement market will maintain its historic track record and continue to meet corporations’ long-term debt requirements for the foreseeable future.

     

9/17/2019 4:09:07 PM