Corporate financing through direct lending

Transcription

1 Corporate financing through direct lending Refinancing activities through direct investments by qualified investors show significant upswing. Privately placed bonds have emerged as a complement or alternative to bank financing and provide investors with the opportunity to realize attractive returns. With the future implementation of Basel III, direct lending will continue to gain importance. Today privately placed bonds account for about 30% of the total volume in Europe (more than 200 billion in 2015). The gap in the yields between privately and publicly placed bonds is decreasing over time. With an average Yield to Maturity of 4.1% (2015) on date of issue, direct lending investments offer qualified investors an attractive portfolio diversification. The Remaco Direct Lending Report is published four times a year and contains information about the European and the Swiss direct lending market. For more information, please contact the authors of the report or the relevant contact person. We are happy to provide you with further details. Remaco Direct Lending Report January 2016 Facts The outstanding credit volume of Eurozone banks has decreased by 570 Billion since the financial crisis The volume in privately placed bonds showed a growth rate (CAGR) of 14.5% over the past decade Privately placed bonds market share has reached almost 30% of the total new issued volume in Europe In 2015 private placements totaled over CHF 200 Billion in the Euro area The average offered YTM for A-rated bonds is 3.0% (2015), with an average maturity of 5.5 years The average offered YTM for B-rated bonds is 6.4% (2015), with an average maturity of 7.4 years Direct Lending is growing in importance, while traditional financing through banks is losing market share

2 As a FINMA-regulated securities dealer and acting according to the Swiss Collective Investment Schemes Act Remaco provides investors with attractive investment opportunities and facilitates direct lending investments with a volume of CHF 5.0 millions or higher. Registered qualified investors, who can accurately judge the risks involved in private placements and are aware of the specific pros and cons can grasp the opportunity to invest in selected private bonds and loans. Transactions are settled by the Swiss bank clearing system via Six Securities Services AG. Each bond possesses its own ISIN- and Swiss security number and can be signed on the Remaco-platform, at the principal bank or via Bloomberg. For further information please contact: Institutional Investors (Banks, insurance companies, pension funds) Pascal Böni, Tel , pascal.boeni@remaco.com Robert Bareder, Tel , robert.bareder@remaco.com External wealth manager Pascal Trösch, Tel , pascal.troesch@remaco.com General Information Pascal Rietmann, Tel , pascal.rietmann@remaco.com The core direct lending team of Remaco consists of adjacent experts. Our internal experts in law, tax and audit can be consulted on a case to case basis for the assessment of individual cases. Members of the direct-lending-team: Pascal Böni MBA, M.B.L-HSG, Chairman of the Board of Directors Remaco Wealth Management AG & CEO Remaco Group Robert Bareder MBA, CEO Remaco Wealth Management AG & Head Remaco Direct Lending Ayhan Güzelgün lic. oec. publ., Head Debt Advisory & Structured Finance Remaco Advisory Services AG Daniel Mischler Dipl. Ing. HTL, Head Business Development Remaco Direct Lending Pascal Rietmann MSc Finance HHS, Consultant Corporate Finance Remaco Advisory Services AG

3 Direct lending. Qualified private investors finance companies Since the start of the financial crisis, the credit exposure of Eurozone banks to nonfinancial corporates decreased by 570 billion Euros to a total of 4.3 trillion Euros. The decline is mainly caused by supply side effects: Increasing regulatory requirements in connection with the introduction of Basel III force banks to reduce risk-weighted assets in order to strengthen their equity base. Furthermore, the current low interest rate environment puts additional pressure on financial institutions earnings. Most directly affected by the bank deleveraging process are companies not capable or willing to bear the high issue costs and rigorous reporting obligations attached to the public placements of bonds. However, the increasing relevance of the disintermediation process also offers opportunities for alternatives to traditional bank financings to increase their market share and potentially fill the gap. Against the background of this development, direct lending the direct placement of bonds with qualified private investors has emerged as a major alternative. This is illustrated by the exponential increase in the amount of private-debt-funds specialized on direct lending. While in Europe direct-lending-funds made up around 20% of all private-debt-funds from 2007 to 2012, by 2013 almost every second fund (48%) pursued this investment strategy. Introduction of Basel III regulations and the impact on direct lending in Europe Despite investors awareness of the issue, multiple reasons suggest that these emerging opportunities have not been fully exploited and will continue to gain importance in the future: The imbalance between supply and demand is especially pronounced in Europe as a result of the lagging development of European debt markets due to the historically strong reliance on banks as primary sources for funding. Moreover, a PwC survey of European banking institutions shows that industry players expect the bulk of deleveraging to occur between 2017 and 2019, since many of the Basel III regulations go into effect during this period. In order to provide an overview of the current market trends and exhibit the attractive investment opportunities in direct lending Figure 1 and 2 summarize new issues in the private placement market that occurred within the last 30 days. Figure 1 displays new issues with maturities of less than five years, while Figure 2 shows bonds with maturities ranging from six to ten years. Remaco Direct Lending Report 3

4 Figure 1: Private placements with issuer rating AAA-CCC, maximum maturity of 5 years, December 15th, January 15th, 2016 Source: Bloomberg, New Issues Monitor Issuer Issue date Coupon Volume (m) Maturity year Mid-Price S&P Rating Industry Currency Metropolitan Life Global Funding I AA- Life insurance USD ehi Car Services Ltd BB- Retail - consumer discretionary Mylan NV BBB- Pharmaceuticals USD Kansas City Southern BBB- Railway USD Mylan NV BBB- Pharmaceuticals USD Principal Life Global Funding II A+ Life insurance USD Kansas City Southern BBB- Railway USD Abe Investment Holdings Inc/Getty Images Inc CCC+ Financial services USD MassMutual Global Funding II AA+ Life insurance USD MassMutual Global Funding II AA+ Life insurance USD Schlumberger Holdings Corp ' AA- Oil & gas, services & equipment USD Schlumberger Holdings Corp AA- Oil & gas, services & equipment USD Harley-Davidson Financial Services Inc A- Automobiles USD USD Figure 2: Private Placements with issuer rating AAA-CCC, maturity of 6 to 10 years, December 15th, January 15th, 2016 Source: Bloomberg, New Issues Monitor Issuer Issue date Coupo Volume (m) Maturity year Mid-Price S&P Rating Industry Currency M/I Homes Inc B+ House construction USD Macedonia Government International Bond BB- Sovereigns EUR Exelon Corp BBB- Energy provider USD Whole Foods Market Inc BBB- Supermarkets & pharmacies USD Solvay Finance America LLC BBB- Chemicals USD Solvay Finance America LLC BBB- Chemicals USD Metropolitan Life Global Funding I AA- Life insurance USD Trust F/ n.a. Real estate USD MEDNAX Inc BBB- Health facilities & services USD Expedia Inc BBB- Internet media USD Group 1 Automotive Inc BB Particularly noticeable is that currently bonds are primarily issued in US Dollars and not in Swiss Francs or Euros. Remaco Direct Lending will fill the current void as of the second quarter of 2016 with designated direct lending bonds. Retail - consumer discretionary Indonesia Government International Bond BB+ Sovereigns USD Commonwealth Bank of Australia BBB+ Banks USD Mylan NV BBB- Pharmaceuticals USD Kansas City Southern BBB- Railway USD Jackson National Life Global Funding AA Life insurance USD Kansas City Southern BBB- Railway USD Lloyds Banking Group PLC BBB Banks USD Credit Suisse Group Funding Guernsey Ltd BBB+ Banks USD BAE Systems Holdings Inc BBB+ Aerospace & Defense USD BAE Systems Holdings Inc BBB+ Aerospace & Defense USD Air Canada Class B Pass Through Trust BBB- Airlines USD California Resources Corp BB+ Exploration & production USD ClubCorp Club Operations Inc B- Entertainment ressources USD Churchill Downs Inc BB Casinos USD Goodyear Dunlop Tires Europe BV BB Auto parts EUR Clear Channel International BV B- Publishing & broadcasting USD Aramark Services Inc BB- Consumer services USD WindMW GmbH n.a. Renewable energy EUR WindMW GmbH n.a. Renewable energy EUR MPLX LP BBB- Pipeline USD MPLX LP BBB- Pipeline USD MPLX LP BBB- Pipeline USD MPLX LP BBB- Pipeline USD Schlumberger Holdings Corp AA- Oil & gas, services & equipment USD Schlumberger Holdings Corp AA- Oil & gas, services & equipment USD Schlumberger Holdings Corp AA- Oil & gas, services & equipment USD Chesapeake Energy Corp BB- Exploration & production USD Harley-Davidson Financial Services Inc A- Automobiles USD USD 4 Remaco Direct Lending Report

5 In 2015 privately placed bonds accounted for about 30% of total volume in Europe Figure 3 compares the growth in the number of private and public placements between 2005 and It becomes apparent, that the growth in the number of privately placed bonds has strongly outpaced the growth of publicly placed bonds. In fact, over the observation period the compounded annual growth rate (CAGR) of private placements with a value of 14.5%, was more than seven times higher compared to the CAGR for public placements (2.0%) Figure 3: Number of private placements versus public placements, Source: S&P Capital IQ, Primary Corporate Debentures, , European Developed Markets, excluding financial firms Private New Issues Public New Issues Table A: Total new issue volume of private and public placements, , CHF billions Source: S&P Capital IQ, Primary Corporate Debentures, , European Developed Markets, excluding financial firms in CHF bn Private Placements Public Placements Private Placements as % of Total 10.3% 15.4% 14.6% 13.6% 19.8% 24.0% 28.5% 29.5% 26.4% 30.5% 29.9% It is also worth noting, that the average volume is higher in private placements. The median offering value in 2015 equaled CHF 405 million in public placements, while in privately placed bond issues the median value was around two thirds higher at CHF 675 million. Figure 4 splits private and public bond issues from 2010 to 2015 into different size segments. It can be observed, that over 50% of private placements fall into the largest size bracket with offering volumes surpassing CHF 500 million. On the other hand only around one third of public bond issues exceed volumes of CHF 500 million and the majority of public placements can be located in the smallest size segment with offering volumes of less than CHF 300 million. This may serve as an indication, that due to the increasing regulatory requirements and the resulting higher costs of public placements large amounts of capital are searching for ways to avoid these additional costs. Remaco Direct Lending Report 5

6 Figure 4: Size distribution of private and public bond issues, total issue volume, , CHF millions Source: S&P Capital IQ, Primary Corporate Debentures, , European Developed Markets, excluding financial firms 60% 50% 40% 50% 52% Private Public 30% 30% 33% 20% 18% 16% 10% 0% <300m 300m - 500m >500m Yield to Maturity Decreasing spread between private and public bonds Figure 5 displays the YTMs at issuance from 2008 to The overall trend reflects important central banks expansive monetary policy of recent years, as well as general yield curve development. Moreover, the high refinancing activities by companies, which in 2015 reached their highest point since 2011, put additional downward pressure on YTMs. Figure 5: Development of average yields to maturity of privately and publicly placed bonds, Source: S&P Capital IQ, Primary Corporate Debentures, , European Developed Markets, excluding financial firms 9% 8% 7% 6% 4% Private Public 5% 4% 3% 2% 2% 1% 0% Privately placed bonds exhibit higher offered YTMs at issuance than publicly placed bonds. A major reason for the higher coupon may be the liquidity premium demanded by investors for holding privately placed bonds with limited tradability. However, it is interesting to observe that the yield difference between privately and publicly placed bonds has diminished over the years. Table B shows that the delta of the YTMs decreased from around 4% between 2008 and 2010 to 2% in A possible explanation for the smaller yield spread is the increasing competition in the private debt segment. 6 Remaco Direct Lending Report

7 Table B: Development of the average yields to maturity of privately and publicly placed bonds, Source: S&P Capital IQ, Primary Corporate Debentures, , European Developed Markets, excluding financial firms ø YTM Private 7.9% 7.7% 7.6% 6.2% 5.8% 6.0% 5.1% 4.3% Public 3.8% 4.0% 3.8% 4.1% 3.1% 2.6% 2.8% 2.3% Delta 4.1% 3.7% 3.8% 2.2% 2.7% 3.4% 2.3% 2.0% Table C presents a comparative analysis of private and public bond issuances in Among other things, the analysis shows that private placements tend to have shorter maturities. Especially maturities of bonds within the A or B rating classes tend to vary more between privately and publicly placed bonds. Furthermore, average maturities of over five years reflect the trend towards bonds with longer maturities, mainly demanded by long-horizon investors such as pension funds or insurance companies. Rating Class 2015 Private Public Ø Offering YTM 3.0% 1.1% A Ø Maturity (Years) # of emissions Table C: Comparative analysis of privately and publicly placed bonds, 2015 Source: Remaco Research, S&P Capital IQ, Primary Corporate Debentures, 2015, European Developed Markets, excluding financial firms Ø Offering YTM 6.4% 3.9% B Ø Maturity (Years) # of emissions Ø Offering YTM 7.8% 7.3% C ¹ Ø Maturity (Years) # of emissions Ø Offering YTM 4.1% 2.3% NR Ø Maturity (Years) # of emissions ¹ Because of the small number of issues with C-rating, the value of this rating class are average values for the years 2011 to The present report has been published by the Remaco Wealth Management AG. It is not meant for distribution and use by natural or legal persons, who are citizens or residents of a state, country or territory in which the current laws prohibit the distribution, publication, issue and use of it. The user itself is responsible to prove, that the acquisition of the information within this report is legal. This material is for informational purposes only and should not be considered as an offer or a request to buy or sell a financial instrument or as a contractual document. The market valuations, conditions and calculations contained in this report are only estimates and can be changed without announcement. The information presented are considered reliable, though the Remaco Wealth Management AG does not guarantee their accuracy and completeness. Past performance is not a guide to future performance. Remaco Wealth Management AG excludes without restriction any liability for losses and/or damages of any kind including any direct, indirect or consequential damages that arise from the use of the present document. Remaco Direct Lending Report 7

8 Our group, since 1947 Active management of our clients financial needs We are one of the leading independent financial services providers in the north-western region of Switzerland. Partner-lead since 1947, we accommodate our clients in our headquarters in Basel and our branch in Zurich. We specialize in the long-term organization and the active management and administration of the assets of entrepreneurs, their families and their descendants. Our membership with Nexia International one of the top 10 networks of independent financial advisors, with over 580 offices worldwide allows us to cater to our clients international needs. Our clients are aware of the complexity involved in the long-term structuring and management of their assets and appreciate the direct contact and guidance of our financial experts. We manage your assets in the long term and with the main aim of asset protection, taking into account both the financial assets (liquid funds in bank accounts, share portfolios, bond portfolios, funds portfolios, pension scheme portfolios, listed real estate portfolios, mixed portfolios) and the non-financial assets (companies owned, qualified holdings in privately held companies, and real estate assets). We offer a broad area of expertise and act as your partner in different financial issues: From traditional wealth management to individualized structured investments. Additionally our status as securities dealer subject to Federal Financial Market Supervisory Authority (FINMA) supervision enables us to give you the option of holding a securities account directly with us or with a bank of your choice. From advice we provide on matters of organizational structures, taxation and the law to the running of private and corporate accounts. From simple corporate valuations to complex financings, investments and succession planning. The combination of consulting and financial services under one roof enables our clients to work with a trusted team and provides them with a gain in efficiency and discretion. Our clients expect and receive: Competence in complex entrepreneurial issues Independent and neutral advice without vested interests Professionalism and discretion Client relationship with a long-term focus Our group s services: Advisory Services Tax advice Accounting Legal advice Company Management Real estate services Audit services Corporate Finance Mergers & Acquisitions Succession planning Management buy-ins (MBI) & management buy-outs (MBO), including financing Financings (Debt, Mezzanine & Equity) Valuation Services Due Diligence Management Wealth Management Management mandates Advisory mandates Professional investor portfolio Investment controlling Third-party asset manager Remaco Advisory Services AG & Remaco Wealth Management AG Hirzbodenweg 103 CH 4020 Basel Phone +41 (0) Fax +41 (0) info@remaco.com Remaco Direct Lending Report 8