US Private Placement (US PP)
Introduction to US PP
Private placement transactions in the US fall within the exemptions established by the Securities Act of 1933. The offerings are not subject to US Securities and Exchange Commission registration and borrowers are not required to publish a prospectus, nor to comply with the extensive disclosure requirements applicable to public offerings. They are only open to accredited or other sophisticated investors which typically include insurance companies, pension funds, hedge funds and high net worth individuals.
This exemption is the most commonly used by US and European companies of all sizes who wish to realize private placements in the US.
The private placement process begins with an information memorandum which describes the borrower, its activities and its financial condition and is disseminated to potential investors, normally by an investment bank.
Interested investors will then perform due diligence on the borrower, a process which is sometimes more extensive than the one conducted by banks providing loan facilities.
The borrower then enters into bond-purchase agreements bilaterally with each investor. Companies should be aware that private placements will often require a greater amount of resources to be allocated for investor relations since any amendments or consents will have to be sought from each investor. However, bond-purchase agreements will often contain clauses providing for majority-investor decisions akin to those found in intercreditor agreements.
USPP transactions are documented on the basis of the Model X forms drafted by the American College of Investment Counsel which have become the market standard. There are different variants of Model X form depending on whether or not the borrower is a US domestic and the borrower’s credit rating.
Although the Model X forms are governed by the law of the state of New-York, another governing law can be chosen by the parties and USPPs have commonly also been governed by English, French or German Law.
While a public rating is not required by law, borrowers will often seek to obtain a private rating from the Securities Valuation Office of the National Association of Insurance Commissioners since insurance companies, one of the main categories USPP investors, are permitted to invest only in rated borrowers. Investors typically require borrowers to give representations and warranties which are similar to those found in LMA-type loan agreements. The bond-purchase agreements will sometimes be backed by securities granted by the borrower as well as corporate guarantees provided by the shareholders or other affiliates. Importantly, bond-purchase agreements contain make-whole clauses and covenants which are similar to those found in facility agreements. These provide investors with a greater degree of structural protection than public bonds since their breach may lead to defaults, attract coupon increases or additional investor fees.
There are a number of key advantages for European corporates carrying out USPPs:
- Borrowers can raise substantial amounts (up to USD 1.5bn) generally denominated in US dollars (seldom in Sterling or Euros);
- USPP offer longer maturities than other private placements (maturities range from 3 to 30 years);
- Notation available for insurance companies; and
- Information can be kept confidential since disclosure is only made to a limited group of investors
European borrowers should seek external legal advice in order to ensure that the private placement documentation does not deviate from market practice and conforms to their existing loan facilities.