NEW YORK-Companies looking to finance their growth might very well find a warm welcome for their securities in the private placement market.
Not only is that market robust and growing, but investor demand has outstripped available supply, according to speakers at the “Private Placements Industry Conference,” Jan. 16, sponsored by the Institute for Institutional Research.
“We’re very bullish on it, and see a modest growth in private placements this year,” said William W. Vogelsgesang, senior vice president of Brown, Gibbons, Lang & Co. L.P. “If a weakness [appears] in some sectors, it could slow things down fast …(but) the private placement market for middle-market companies is here to stay.”
When the final numbers are in, 1996 will prove to have been a banner year for private placements, at least $25 billion ahead of the $132 billion total for all of 1995, according to Securities Data Corp. figures cited by Curt W. Voges, managing director of BancAmerica Securities Inc.
“One of the big drivers is the search for assets,” he said. “Institutional investors historically have liked private placements, and they haven’t seen enough deals relative to (their) incoming cash flow.”
Partly due to the demand-supply imbalance, the private placement marketplace has become more favorable to issuers in other respects as well. For one thing, the standardization of documentation “has ironed out a lot of issues that used to have to be negotiated on an individual basis,” Voges said. Partly as a result, secondary trading has become more prominent, making the private placement market more liquid and therefore more desirable to investors. Last year, more than 30 investors traded more than $2.4 billion in private placements in the secondary market, he said.
Other favorable factors include the fact that risk-related premiums investors are demanding have been declining. Investors in privately placed debt securities also have shown willingness to lend more patient capital.
In more than 60 percent of debt private placements completed last year, final maturities were at least eight years. This proportion is a flip-flop from the situation in the two prior years when 55 percent of such deals had final maturities of seven years or less. As a quid pro quo, however, investors are starting to demand more protection against calls, or issuer buy-backs of debt securities prior to their final maturity dates.
Another factor driving the private placement marketplace is the development of standardized assessments of credit-worthiness for such deals by the ratings agencies, like Moody’s Investors Service Inc. and Standard & Poors Corp. This development, “makes it easier for investors to compare (bank) loans with private placements,” Voges said.
Furthermore, the ratings agencies “have demonstrated less of a size bias (against smaller issuers), which used to be a problem,” he said.
