Primary Markets
Primary Markets by Ruari Ewing, Charlotte Bellamy, Katie Kelly and Mushtaq Kapasi
Mid-cap bond markets in Europe Introduction Facilitating access to finance for SMEs has been a global policy goal for some time1 and is considered to be increasingly important in the wake of the pandemic, the economic shocks stemming from the war in Ukraine and the challenge of accelerating the green transition2. In the EU, broadening access to market-based sources of financing for European companies at each stage of their development is at the heart of the Capital Markets Union initiative3. While bond markets may not be an appropriate financing option for all SMEs (in particular at the smaller end of the spectrum), they can play an important role in the diversification of financing sources for mid-cap companies, offering flexibility in terms and structures and no dilution of control. In this context, in June 2022, ICMA gathered a group of market participants representing banks, investors, law firms and stock exchanges from across Europe to identify opportunities to increase mid-cap (or “sub-benchmark”) issuers’ access to cross-border bond markets in Europe. This article summarises the current landscape and challenges to developing cross-border activity in mid-cap/subbenchmark bond markets in Europe, and then outlines some areas that may be worth considering further.
Current landscape There are a range of existing, complementary bond or bond-style markets available to mid-cap/sub-benchmark issuers in Europe (both rated and unrated), with a range of characteristics that offer different advantages and dynamics for issuers.
Many existing markets, such as the Euro Private Placement market, the Italian minibond market, or the Alternative Fixed Income Market (MARF) operated by Bolsa de Madrid, are primarily domestic in nature. A key reason for the prevalence and success of domestic markets is considered to be the importance of proximity between investors and the issuer. Proximity helps investors assess credit because they understand better the issuer’s operating environment and business model. Some global institutional investors (including US investors) have established regional offices (eg Paris, Frankfurt or Milan) in order to assess local European credit more easily. In addition, investors may be less inclined to invest internationally in mid-cap debt securities if they are able to achieve appropriate pricing premia via investment in domestic mid-cap issuers’ debt securities. Similarly, issuers in some jurisdictions may be able to access the capital they need from convenient domestic institutional investors or bank financing, meaning there is no imperative for those companies to issue debt securities internationally. Some markets accessed by mid-cap/sub-benchmark companies in Europe are cross-border in nature. The main example is the US Private Placement (USPP) market. The USPP market involves primarily US investors, but recently has involved some European, Canadian and Asia Pacific investors as well. It is now used by issuers from across Europe. Average annual volumes over the past five years are informally estimated by an ICMA member active in the market to be around $19 billion for UK&I issuers and around $8.5 billion for European (ex UK&I) issuers. US investors are reported to have welcomed the opportunity to invest in a broader range of companies in recent years and have taken steps to make the market more attractive for nonUS issuers, for example by lending in the issuer’s local currency (euro or sterling) and then swapping back to US dollars. USPP investors are understood to have sophisticated credit management processes. Longer maturities (such as 10-12 years) compared to bank financing are available.
1. See the G20/OECD High Level Principles on SME Financing, 2015, due to be updated this year. Recently, the FSB has highlighted the large number of non-financial companies (in particular SMEs) with debt restructuring needs following the massive public credit provision extended during the COVID-19 pandemic and the OECD has drawn attention to the need for SMEs to be able to access a diverse range of funding options. 2. Preface to Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard 3. European Commission Capital Markets Union Action 2 - Supporting access to public markets PAGE 32 | IS S U E 66 | THIRD QUARTER 2022 | ICMAGROUP.ORG
