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April 10, 2006, 12:01 a.m. EDT

Private Debt Sales Are Poised For A Big Comeback

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By Henry E. Teitelbaum

LONDON -- Cross-border private debt sales are set for a big comeback as more U.K. and European companies seek to raise funds from U.S. investors while avoiding entanglements with regulators.

Reversing two years of declining activity, company-to-company transactions tailored to the needs of both borrower and lender are on the rise. Cross-border acquisitions and capital spending are generating increased demand for funding while flat yield curves prompt lenders to seek out and lock in even modestly higher returns.

"More and more issuers are becoming aware of the cross-border financing opportunities available" through private placement, said Richard Thompson , head of Cross-Border Private Placement for J.P. Morgan Chase & Co.

The attractions of such deals, including flexibility and the diversity of investment they bring, are attracting larger deals with a wider range of borrowers, he said. Last year, the average cross-border private placement was $168 million, or 12% more than the $150 million placed in 2004.

Private placements of debt are unregistered and unrated, with terms negotiated with a small number of investors. U.S. investment funds and insurers are keen to lend money this way because it brings both diversification and stability to their portfolios and because many European corporate borrowers have low credit-default profiles.

"Europe is a geography we're comfortable with," said David Barras , managing director of Milwaukee-based Northwestern Mutual Investment Management Co. The company manages a $20 billion portfolio of private placements, of which 20% are from Europe. "We're seeing a number of high-quality companies both operationally and financially."

Pricoa, the European branch of the U.S. company Prudential Capital Group, invested $6.6 billion in private debt in 2005. Of that, $931 million was invested in European companies. Managing Director Allen Weaver said he expects the market to grow in the next few years because economies are strong and corporations are investing more.

"The merger-and-acquisition market is fairly active on both sides of the ocean," he said. "The world economy is in relatively good shape; there's a lot of economic activity, and that drives the need for capital."

For borrowers, private placements are appealing because they allow companies to raise money more cheaply or more simply than they could through a traditional syndicated bank loan or the public corporate-bond market.

For European companies anxious to circumvent stringent U.S. Securities and Exchange Commission reporting requirements, private placements offer an alternative to the much larger Eurobond market, which for years has given European companies access to U.S. investors. This market, which is also growing, requires registration even for the parts of the loans -- known as 144A tranches -- that are sold privately to sophisticated U.S. investors.

U.K.-based building-materials distributor Wolseley PLC last year placed $1.2 billion with private U.S. institutional investors. Steve Webster , finance director, said the company initially sought $500 million, but demand was so strong that the company could have raised as much as $1.5 billion.

Wolseley, which has until now relied on bank debt for its financing, decided to diversify into the U.S. private-placement market because while yields are similar, it was able to borrow in the U.S. currency for as long as 15 years, Mr. Webster said. Banks in Europe are generally reluctant to lend money for more than seven years, while the market for corporate bonds with maturities between seven and 10 years has yet to emerge in Europe.

Car maker Volkswagen AG, based in Wolfsburg, Germany, has also tapped the U.S. private-placement market, recently borrowing $660 million to refinance some of its U.S. debt. A spokesman said these placements are "interesting alternatives" to traditional lending, as the company's U.S. car-financing unit, VW Credit Inc., can't issue any midterm bonds over more than two years, because of SEC restrictions.

Smaller companies, too, are turning to the private-placement market. Ashtead Group /zigman2/quotes/200232063/delayed UK:AHT -0.27% PLC, a U.K.-based equipment-rental group serving the U.S. and U.K. construction, industrial and homeowner markets, has a market capitalization of £939 million ($1.64 billion), but late last year it increased its U.S. senior debt facility of $675 million to $800 million, or £459 million.

The company, which in 2003 failed a quarterly test on its U.K. banking covenants, triggering a technical default, faces far less restrictive terms with its new facility, which it established in 2004.

Ian Robson , Ashtead's finance director, said that because the company's asset base -- its rental fleet -- secures the new loan, it now has no quarterly financial-performance covenants as long as it maintains available funds of at least $50 million. The new asset-based loan gives Ashtead cheaper funding and greater flexibility on capital spending than previously.

-- Paula Park and Christoph Rauwal contributed to this article.

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