MAY 2013

Discover Value.

Private Placement Bonds:

Shedding light on a valuable alternative
Private placement bonds, a valuable segment of the
fixed income securities market, offer institutional
investors significant opportunities. Private bonds offer
investors enhanced yields, covenant protections and
increased diversification.
While the rewards are significant, the level of expertise
and resources required pose a notable barrier to
entry. Private bonds demand extensive due diligence.
Investors must have considerable legal, credit and back
office resources and expertise in order to evaluate,
negotiate, underwrite and monitor private bonds.
Building those capabilities requires time and resources,
which is why investors may form a relationship with a
firm that provides such expertise.
Private bonds are best suited for investors with
intermediate and long-term maturity needs and the
capacity for reduced liquidity in a portion of their
portfolio. In the search for yield, private bonds merit
careful consideration.
This paper takes a closer look at the private placement
market, at who buys and sells private bonds and at the
requirements of a successful private bond program.

Lifting the Curtain on Private Placements

Private placements are unregistered debt securities sold
directly in the private market. They combine features
of public corporate bonds and bank loans, offering the
longer duration of fixed-rate corporate bonds while
providing similar legal protections to those found in
commercial loans. Private bonds are issued for the
same purposes as public bonds: refinancing debt,
expansion, acquisitions, fundraising to take a company

Source: Bank of America. Period of 9/30/2011-12/31/2012.

Source: Bank of America/Merrill Lynch.

Insights
Higher relative yields and covenant protection
compensate for lower liquidity
Issuers are primarily investment-grade companies seeking
diverse funding sources
A multitude of names not found in the public market
help diversify corporate exposure
Borrowers with custom funding needs use the private
market for term, fixed-rate funding
Participation requires specialized underwriting and legal
expertise and relationships with agents and issuers; as an
alternative, investors can develop an association with a
firm providing those capabilities

private, and stock buyback and recapitalization

programs.
Higher returns attract private bond investors. Yields
can be 20-601 basis points greater than comparably
rated public bonds. Private bond holders typically
have more robust rights through covenant protections.
Private bond covenants often limit the ability of other
creditors to be in a more senior position.
The tradeoff for higher yield and better protection
is lower liquidity. Private bonds are not publicly
registered, can only be purchased for investment as
opposed to resale, and can only be sold in private
transactions to accredited investors.
The United States private market is unique. In 2012,
more than $54 billion in private bonds were issued
in the U.S. in more than 200 deals, compared with
$1 trillion in public bond issues. The average deal size
was $256 million, and the largest was $2 billion. 2

Continued

PAGE 2

Companies ranging from small, privately-held

organizations to large multinational corporations
use the private market. A major power company, an
internationally-known automobile manufacturer, an
international airport, a well-known food company and
several major league sports franchises recently issued
private bonds. High quality companies dominate the
private market, giving investors an opportunity to
diversify without sacrificing quality.
General industrial, and energy and power companies
each accounted for 32% of the issues in 2012, as the pie
chart shows. Issuance is typically dominated by these
two sectors.
Non-U.S. issuers accounted for the majority of private
bonds, following the historical trend. Domestic
issuance remained the single largest geographic
concentration, accounting for 44% of issuers in 2012.

Private Bond Issuers, 2012

General Industrial
Energy & Power
Consumer & Retail
Media & Telecomm
Real Estate & Gaming
Tech/Bus Svcs
Financials
Healthcare

U.S.
Europe
Aus/NZ
Canada
Other

Source: Bank of America/Merrill Lynch. Debt Private PlacementsMarket Perspective, 1Q 2013 Recap.

32%
32%
14%
6%
5%
4%
4%
3%

44%
38%
10%
6%
2%

As the table shows, private bonds are typically

investment-grade, predominantly NAIC 2 (BBB)3
rated borrowers.

% of Issues Rated NAIC 1 & NAIC 2, 2008-2012

2008

2009

2010

2011

2012

NAIC 1

34%

42%

35%

30%

37%

NAIC 2

66%

58%

65%

70%

63%

Source: Advantus, Private Placement Monitor.

Why Issuers Access the Private Market

Issuers turn to the private market for several reasons.
They may wish to diversify credit sources. Some
organizations prefer keeping financial and company
information somewhat private. In some cases, the
small size of an issue may rule out the public market.
A company without a long credit history may also
view the private market as a path to building a good
reputation in preparation for future public bond
market entry.
Diversifying credit sources allows a company to choose
between bank loans, private issues or public bonds to
meet a particular funding need. Public bond issuers
may maintain long-standing relationships with the
private placement market to keep this channel open.
During the 2008 financial crisis, the private placement
market continued to function.
Private bond issues do not require registration
with the SEC or a rating from rating agencies. The
company issuing a private bond must provide detailed
information, but that information is shared with a
limited group of potential investors. Approximately
5-20 investors purchase the typical private bond
issue. This limited disclosure of financial information
to investors can appeal to family-owned or closelycontrolled companies.
Custom debt structures and terms are more readily
accepted by the private market. Most private offerings

Each private bond purchased by a U.S. life insurer is annually assigned a risk-based capital rating by the Securities
Valuation Office (SVO) of the National Association of Insurance Commissioners or given an equivalent designation
based on a monitored Acceptable Rating Organization (ARO) per NAIC guidance.

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PAGE 3

include multiple tranches with different maturity

dates and interest rates. A $200 million private bond
offering, for example, may consist of four separate $50
million tranches with maturities of 5, 7, 10 and 12
years.

Private Investors: The few, the

knowledgeable, the experienced
The private bond investor universe is comprised of
about 50 institutional firms. Investors consist largely of
life insurance companies, followed by asset managers
and pension plans in the United States and the United
Kingdom. Most of these firms have a lengthy private
bond history, although new investors have recently
shown increased interest. One option for new investors
to the private bond market is working in association
with an experienced private bond advisory firm.
Investors value higher yields, a level of credit quality
comparable to the public market and the opportunity
for pre-purchase due diligence found in private bonds.
Private bond holders can also build relationships with
management at the time of the deal and maintain those
relationships after purchase, which can be important if
covenants come into play.
The private market offers investors diversification
through a multitude of companies that issue private
debt. The international origins of many issuers offer
a further diversification opportunity. Insurance
companies also value the ability to match their
liabilities with the typically longer private bond
maturities.
Purchasing a private bond is a legally intensive
process. Investors must have the credit underwriting
expertise to price private bonds and the legal skills and
experience to evaluate deal terms and covenants.
The Note Purchase Agreement (NPA) contains
negotiated terms and conditions, including covenants.
The NPA also typically defines default events (failure
to make timely payments, breach of covenants, etc.),
outlines default remedies and includes call protection
terms (T+50 make-whole is market standard).

Covenants Differentiate Private and

Public Issues
Covenants are a key differentiator between public and
private bonds. They govern the relationship between
the private bond issuer and the investor, protecting the
bond holder. Skillful covenant evaluation when buying
bonds can mitigate an investors losses and improve
recoveries in a default scenario.
Covenants legally compel management to maintain
key financial metrics. Examples include limits on debt
relative to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), restrictions on asset
sales, and requirements to maintain minimum coverage
ratios. Covenant violations can trigger default and/
or compensation to bond holders through waiver
or amendment fees, coupon bumps and prepayment
premiums.
Private bond holders regularly receive financial
information from the issuers. Issuers provide quarterly
or semiannual financial statements and covenant
compliance certificates. They also must notify bond
holders of default events and respond to bond holder
requests for additional information, or provide access
to management. Covenants may result in renegotiation
with bondholders or provide an exit route if the
company is struggling to comply with the covenants.
Investors must represent at the time of purchase that
they plan to hold private bonds to maturity but there
is a limited secondary sale market available. Sometimes
bond issuers themselves repurchase their own private
bonds before maturity, either at their option pursuant
to prepayment provisions or as required pursuant to
change in control provisions that may be in the private
bond terms.

Where Diligenceand Timeare Demanded

Diligence is the price of admission to the private
market. The responsibility for underwriting
private credit risk falls on the buyer. Buyers must
independently analyze and price credit risk. They also
need considerable legal expertise.
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PAGE 4

Relationships are also important in this market.

Successful private placement buyers form strong
connections with issuers, placement agents and
legal advisors. They also participate in the market
frequently enough and hold a private bond portfolio
with sufficient scale to make their investment in credit
underwriting, legal and back office infrastructure pay
off.

portfolio takes time. Investors must be selective and

attentive once the investment is part of their portfolio.
Proactive credit monitoring, ongoing reviews of
covenant compliance, and periodic valuation analysis
are necessary exercises in maintaining a healthy private
portfolio.

Successful private programs are built on the knowledge

that not all private bonds are created equal, and
that strong covenants alone do not justify investing
in a weak company. Creating a strong private bond

Specialized Maintenance and Ongoing Due Diligence Enhance Portfolio Value

Continued

PAGE 5

Comparing Public Bonds, Private Bonds and Bank Loans

Public Corporate Bonds Private Placement Bonds

Bank Loans

Credit Quality

Investment-grade

Investment-grade

High yield

Security

Unsecured

Initially unsecured with

limitation on priority debt

Secured

Covenants

None/limited

Typically parallel banks, may

be less restrictive

Comprehensive

Rate

Fixed

Fixed

Variable

Rate Adjustments

None

If negotiated for covenant

breach

Spread set according to

leverage grid

Maturity

Full spectrum

Intermediate to long

3-8 years

Prepayment

Non-call or make-whole
provision

Non-call or make-whole
provision

Pre-payable at par

Liquidity

Registered

Unregistered

Unregistered

Investor Base

Broad

Narrow; largely insurance

companies

Increasingly broad; institutional

investors and funds, banks

Summary
The U.S. private bond market for decades has provided
borrowers across the globe with customized term
funding solutions. Investors have earned higher returns
through improved yields and fee income, increased
diversification and strong investor protection.
It takes an experienced hand to successfully tap the
benefits of the private market. Investors can find that
experience by working with an asset manager who
has specific private placement underwriting and legal
expertise, and solid private market relationships. At a
time when the search for yield is so intense, investors
owe it to themselves to look closely at the private
placement market.

Advantus Capital Management has successfully

managed private placement portfolios for over 40
years. We select private bonds through a disciplined,
rigorous process.
Our dedicated underwriting, surveillance and servicing
teams create strong income-producing portfolios for
our clients.
Benefit from private placement bonds:
20-60 1 basis points of additional yield over comparable
public bonds
Diversification with high quality companies not
available in the public market
Robust provisions that protect investors and, if the
unintended happens, potential to renegotiate terms
and/or receive compensation

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For more information, contact:

Julie Gerend, Sr. Vice President Business Development & Client Service
651-665-3845
julie.gerend@advantuscapital.com
Steve Moen, Vice President Business Development
651-665-3856
steven.moen@advantuscapital.com

This document is directed at institutional investors and consultants. It should not be distributed to or relied on by retail investors. This
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this presentation are legally binding on Advantus. Unless otherwise stated, all views, projections and opinions are those of the authors as of
the date of this document and are subject to change without notice. Statements concerning financial market trends are based on current market
conditions, which fluctuate. The value of investments and the income from them can go down as well as up and an investor may not get back
the amount invested. Past performance is not a guide to what might happen in the future. This is not intended as a recommendation, offer or
solicitation for the purchase or sale of any financial instrument.

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