Tender: Identifying Market and Regulatory Obstacles to Development of Private Placement of Debt in the EU
Belgium, 31 May 2016
In the context of the Capital Market Union's Action Plan, the Commission would like to carefully examine the remaining national barriers that could hinder the take up of private placements in the juridisctions where this funding channel is still underdeveloped and disseminate best practice identified in the well-established markets.
TASKS TO BE CARRIED OUT AND EXPECTED RESULTS
This study will have both economic and legal components:
Economic part of the study
Stock-taking of well-functioning private placement markets
The Commission expects a comprehensive analysis on the structure and functioning of the following private placement markets:
the German Schuldschein market,
the French EuroPP market/ the Pan-European Private Placement market (i.e. the European private placement market outside Germany) and
the US private placement market. The contractor should provide global data on the three private placements markets (such as gross issuance per year, number of issuances, outstanding private placements…).
This study should also allow conclusions to be drawn on the evolution since 2012 until 2016 of those three markets with a special focus on:
The supply side: The study should look into the characteristics of the firms issuing privately placed debt instruments, such as their size, place of incorporation, economic sector, whether they are rated, etc…The study should also provide information on issuers' key financial ratios (debt/equity, ROE…) as well as the level of transparency they offer towards investors;
The demand side (investor base): The study should look at the characteristics of private placements issuers and their investments (category, nationality, average investment...). The study should look in particular at insurers' investments in private placements (direct investment or through funds, share of their portfolio invested in private placements, diversified portfolio or stand-alone investments…);
The cross-border dimension of demand and supply side; and on
The private placement transactions themselves (e.g. statistics on deal size, maturity date, currency used, bond or loan format, listed transactions or not…).
This study should also provide qualitative information on how those three different markets concretely work (and, if this is the case, to what extent and how they compete with each other). The study should notably identify the successful features and characteristics of those markets and how those practices could be usefully replicated in different EU Member States.
Cost-benefit analysis of private placements vs corporate bonds & syndicated loans
The contractor should provide a thorough qualitative and stylised description of how the German Schuldschein market and the French Euro-PP/Pan-European Private Placement Market can complement the corporate bond market/Euro-bond market and bank-financing (including syndicated bank loans), especially for mid-sized firms. The study should underline the advantages and drawbacks of private placements over corporate bond financing and bank lending (syndicated loans, for instance). The contractor should also provide an assessment of the issuing costs of a private placement financing in its different formats and issuing markets, compared to those other sources of financing.
Assessment of growth potential of the private placement markets in Europe
A key component of the economic part of the study is a quantitative analysis to evaluate the growth potential of the private placement markets in the jurisdictions where this funding channel is still underdeveloped. Based on the characteristics of private placement issuers and investors in the well-established markets, this study should assess the barriers to entry and determine the potential number of private placement issuers and investors (and their financial capacity) across the EU. Based on sound economic assumptions, the study should identify Member States where there is a larger potential for private placements. The analysis should identify the main economic barriers in the way of this development. The study also needs to identify the reasons explaining the recent growth of the Schuldschein market and the French Euro-PP/Pan-European private placements markets (such as growing M&A activity, search for yields by institutional investors, bank deleveraging...) and determine how those factors can be sustainable in the long term.
Risk analytics of private placements
The study should assess the risks (credit risks, market risks, counterparty risks…) of existing private placement deals issued on the German Schuldschein, the French Euro-PP/Pan-European Private Placement market and the US private placement markets. The study should examine the interest rates offered to investors per level of risk and compare this to the corporate bond market. The contractor should also look at the evolution of market values of private placements. The contractor should also provide information on the default and recovery rates (in the event of default) on the Schuldschein market (notably after the 2008 financial crisis) and the French Euro-PP/Pan-European Private Placement Market. The contractor should examine the extent to which private placement investors follow a "buy-andhold" strategy, how they manage risks related to their investments and how they value them (market valuation or other economic valuation metric used by investors…). This will also imply looking at the liquidity in the secondary market of private placements, especially those traded on dedicated exchanges.
Mapping of innovation in the private placement sector
The contractor should conclude with a treatment of innovative private placement initiatives through the EU. Those initiatives could include e.g. web-based portals to better match investors and issuers of private placement, the secondary markets (notably multilateral trading facilities) dedicated to the listing of privately placed bonds and the main features of the listing rules applying to those markets, the new forms of contracts (private placements by tranches, with different maturity dates…), investment funds dedicated to investments through private placements…
Legal part of the study
Identification of best practice in terms of the legal framework for a wellfunctioning private placement market
The Commission expects a rigorous analysis of the legal environment of private placements in the jurisdictions where this funding tool has been already successful, mainly in Germany, France and the US. This study should provide information on national provisions applying to private placements, notably on civil, company, banking, insurance, insolvency, tax laws (with a special focus on withholding taxes) and accounting rules. This study should conduct a qualitative analysis of the provisions that may explain the success of private placements in those Member States. It should look at soft law rules aimed at facilitating the issuance of private placements. The contractor should identify regulatory best practice as well as the areas where some improvements could be brought to the regulatory framework applying to private placements in those jurisdictions.
Identification of potential legal barriers to the development of private placements across the EU
The Commission also wishes to obtain qualitative information on the potential impediments to the development of private placements stemming from national and/or EU legislation11 in the jurisdictions where private placement is still underdeveloped and where the economic part of the study will show potential for growth (see III. above). The contractor should notably look at specific regulatory frameworks that some Member States have put in place for private placements and determine whether those regimes are likely to sustain the issuance of private placements. For the countries with no specific framework in place, the contractor should also conduct an in-depth analysis of national provisions of civil, company, banking, insurance, insolvency or tax laws (especially withholding tax) and accounting rules that could hinder the take-up of private placements. Finally, the study should also analyse national provisions introduced in national law to facilitate the development of private placements and analyse how a given market may have changed after policy intervention.
Legal Management of risks in private placement transactions
The contractor should also provide information on how the financial covenants included in private placement contracts concretely work and how they mitigate the risks of such investments (notably the counterparty risk). The contractor should conduct a qualitative analysis of the most common clauses (such as guarantees, negative pledge, gearing ratio, leverage ratio, loan to value ratio, interest cover ratio, interest step-up, limitation to dividend distribution…) and should look at how and what kind of information is provided by the issuer to investors. This work should enable the Commission to understand how the investors in private placements are protected from the risk of default of the issuer.
Submission Deadline: 6 July 2016
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