1. law, govt and politics
2. government

Q4: Is any action by the EU needed to support the development of private placement markets
other than supporting market-led efforts to agree common standards?
The UK strongly supports efforts to develop a pan-European private placements (PP) market. In this
context, “private placement” means a medium or long-term debt financing transaction negotiated
between a listed or unlisted company and a small number of institutional investors. A fuller and
more precise definition is set out in the International Capital Market Association’s (ICMA) PanEuropean Corporate Private Placement Market Guide.
Developing a pan-EU PP market would have real benefits. For borrowers, PPs provide a stable longterm source of finance, as noted above, and reduce dependence on bank loans. For investors, PPs
allow risk diversification and, where relevant, enable long-term liabilities to be matched with longterm assets.
The potential benefits of more PP activity in Europe are demonstrated by the success of the US PP
market, in which companies borrow roughly $45 billion each year, and the German schuldschein
market (approximately €9 billion of activity each year). These markets play a significant role in
financing mid-sized companies. The scale of the US and German markets, and the encouraging
progress in France recently, gives a sense of what might be achievable in a pan-European PP market
in the longer term.
A. Recent initiatives – Market participants and national governments have worked together to
dismantle barriers
The UK government has for a number of months been considering the main barriers to the
development of a pan-European PP market. We have concluded that these barriers do not derive
from existing legislation. Rather, they include (i) the absence of common market practices and
standards, (ii) the lack of a generally accepted definition of a PP, (iii) the lack of standardised
documentation (which is a key feature of better established markets, such as the corporate loan
market), (iv) uncertainty amongst investors as to the application of Solvency II to PPs (though we
have not identified any specific barriers within Solvency II), (v) “competition” from other sources of
funds including, for example, bank loans, the public bond markets (for larger companies) and the US
PP market, and (vi) withholding tax (in some Member States). Given these barriers, many UK and
European asset managers have not (to date) invested in building internal teams focused on investing
in PPs.
It will be apparent from the list of barriers above that, with the exception of withholding tax, it
would not be appropriate to try to solve them in a “top-down” way via new legislation. Rather, the
barriers can and should be solved primarily by market participants. As such, it is welcome that key
market participants and their representatives have recently taken the lead in dismantling many of
the existing barriers. For example, as noted above one of the main barriers (until recently) was the
lack of a universal definition of the PP market, together with an absence of common market
practices and standards. ICMA has led an initiative to overcome these barriers, which culminated
recently in the publication of the Pan-European Corporate Private Placement Market Guide. This
initiative brought together trade bodies, investors, representatives of borrowers and law firms from
a variety of Member States (including France, Italy, the Netherlands, Germany and the UK) to agree
the contents of the Guide, which sets out a voluntary framework of best practices for PP
transactions. The parties to any particular transaction are of course free to depart from the Guide as
they wish, which is entirely appropriate given that PPs are, by nature, negotiated between the
relevant parties.
Market participants have also worked together to dismantle another important barrier to the
development of this market, namely the lack of standardised documentation. Standardised
documentation is a key feature of many other financing markets, such as the corporate loan market.
In January, the Loan Market Association published standardised documentation for the emerging
private placements market.
These market-led initiatives have been supported and complemented by targeted government
interventions. At Autumn Statement 2014, the UK government announced a new exemption from
withholding tax for private placements. In response, six major institutional investors committed to
invest around £9 billion in private placements and other direct lending to UK companies over the
next five years. We understand that the Italian government has also taken similar action to remove
withholding tax barriers.
National governments and market participants have thus worked together to dismantle the barriers
which seem to have held back the private placements market until now. As this asset class becomes
more established and more PP activity takes place, it is hoped that other barriers, such as the lack of
PP specialists within many asset management firms, will in turn fall away.
B. How can the EU assist?
As set out above, there are no readily identifiable barriers which could be eliminated by EU
legislation. However, we would suggest that the Commission pursues the following points:
(i)
Explore the costs and benefits of emulating the US NAIC credit scoring system. In the
US, National Association of Insurance Commissioners (NAIC) credit scores are a key
feature of the successful PP market. The Commission could carry out a cost-benefit
analysis of the idea of an EU equivalent. The NAIC, a central body for state-level
insurance regulators, provides ratings services to US insurers investing in private
placements. Issuers are not charged for these ratings and the upfront cost to investors
is low. NAIC ratings are provided “post-transaction” and so are not a like-for-like
substitute for ratings provided by private sector ratings agencies, but crucially they
provide investors with clear and certain regulatory treatment. An NAIC-like model has
the potential to provide EU investors in non-standard instruments such as private
placements with similar certainty. It also has the potential to harmonise regulatory
treatment of non-standard investments across the EU. However, careful consideration
would be needed as to whether such a system would be compatible with existing
regulation and if not, whether any necessary adjustments would be appropriate. As part
of this exercise, the Commission would need to consider, amongst other things, how
such a body would be structured and funded (and we reserve our position on these and
other points, pending further discussion). Separately, the Commission might also
consider whether the regulatory regime which applies to the schuldschein market could
be adopted more widely across member states and whether there are any barriers
which prevent this. We understand that BaFIN has developed a simple regime so that
institutional investors can easily calculate the regulatory capital needed for retention
against specific private placement investments. Of course, if this regime were adopted
more widely it should be voluntary – institutional investors should continue to have the
right to choose to adopt an Internal Ratings Based system.
(ii)
Encourage relevant Member States to consider exempting PPs from withholding tax.
International capital market investors expect interest to be paid gross (without the
withholding of tax). As noted above, at Autumn Statement 2014, the UK government
announced a new exemption from withholding tax for private placements. This is not a
tax break, as withholding tax is a method of collecting tax, rather than a tax in itself.
However, this change removes an administrative barrier for investors. We understand
that in some Member States, an obligation to withhold tax in respect of interest
payments on PPs continues to exist. It is a matter for Member States to decide whether
this is appropriate. However, the Commission could encourage Member States to at
least consider the possibility of exempting private placements from withholding tax,
given the positive impact this change has had on PP activity involving UK businesses.