Scope notes the H1 2016 volume was very much driven by ‘jumbo’ transactions, with seven placements exceeding EUR 500m, i.e. Hofer, Porsche, Nordex, TenneT, due to strong oversubscription from investors. Nevertheless, the market remains very diverse, with ticket sizes ranging from placements at a very small EUR 11m up to EUR 1.6bn. From Scope’s perspective, placement activities will remain strong, particularly in the light of this financing instrument’s resilience in times of economic uncertainty. However, a higher rating penetration of issuers would, in our view, help the SSD market’s growth with much needed transparency on issuers’ external credit quality.

Increasing heterogeneity in the market

While high-volume transactions have been a clear trend in H1 2016, Scope notes that the market remains strongly heterogeneous regarding issuer sizes, transaction volumes and financing needs (e.g. refinancings, debt diversification or M&A for Grammer, Nordex and HeidelbergCement). About 30% of transactions have been issued by small and mid-sized corporates (annual revenues below EUR 1bn), which is well below the 40% among the same group in 2014 and 2015. However, among first-time issuers, small and mid-sized corporates remain more present with about 50% of such companies issuing for the first time. Also more than one-third of transactions remain equal or below EUR 100m, which not only points to size of the issuer, but also to SSDs being just one element of corporate debt funding.

Oversubscription squeezes spreads

The new record of ‘jumbo’ transactions underpins the market’s focus on this financing instrument. Such jumbos point to the increasing diversity of investors as a diverse mix of international and domestic investors is needed for such ticket sizes, according to DCM desks of leading SSD placement banks. While these transaction volumes are the result of attractive spreads against comparable public debt issues, they also underpin the strong resilience of the private debt market compared to the public bond market under bumpy capital market conditions (i.e. uncertainties regarding the Brexit referendum or China’s economic developments). Scope believes that spreads remain tight, which is still surprising given the lack of transparency in the largely publicly unrated SSD market (fewer than 30% of issuers in H1 2016 carry a public rating/median rating of BBB).

Outlook

Scope believes corporate funding through SSDs will remain in the spotlight of both investors and corporates. With strong transaction volumes in H1 2016, the market is on a good way to catch up with the record EUR 20bn in 2015. Nevertheless, this will largely depend on further jumbo transactions. A recent survey of the Loan Market Association shows that market participants are bullish on further growth of the SSD segment. This is particularly interesting when compared to expectations about a flattish development of the traditional corporate loan market.

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