Private placement
Also known as: US private placement, Schuldschein, Direct note issue
Notes sold to a handful of institutions directly. No public document, often no rating, and covenants closer to a loan than a bond.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
Not every company that wants to borrow for ten years is big enough, or well known enough, to sell a public bond. A private placement is the route for those that are not.
Instead of hundreds of investors buying a bond in an afternoon, a handful of insurance companies and funds buy notes directly from the borrower. There is no public document and often no credit rating. Each investor does its own work and makes its own decision.
What the borrower gets is long-term money it could not otherwise raise, from lenders who will take the time to understand a business that does not fit a standard category.
What it gives up is freedom. Because each investor is making a real credit decision rather than buying a rated instrument, they ask for the kind of protections a bank loan carries: financial tests, checked every quarter, that a public bond would never contain. Those tests bind for the whole life of the notes.
- 1
Preparation3–6 wks
An information memorandum is prepared for a small group rather than a prospectus for the market.
- 2
Investor meetings1–3 wks
The borrower meets each investor, which is a credit conversation rather than a marketing exercise.
- 3
Negotiation2–5 wks
Financial covenants and terms are agreed bilaterally, which is why these look more like loans than bonds.
- 4
Documentation2–4 wks
A note purchase agreement is signed with all the investors together.
- 5
Fundingdays–mths
Money is drawn, sometimes months after signing, which is a feature this market has and the public one does not.
Credit approval — Each investor separately decides. There is no book to hide in: every investor makes its own decision and can simply decline.
Covenant agreement — The investor group decides. Financial covenants that a public bond would never carry are ordinary here, and they bind for the whole life.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The borrower | Sell side | Often unrated and sometimes unlisted, borrowing long without a public document. |
| The investors | Buy side | A handful of insurers and funds, each making its own credit decision with no book to hide in. |
| The agent bank | Sell side | Runs the process and introduces the borrower to a market it cannot reach alone. |
| The lawyers | Both | Negotiate financial covenants that a public bond would never carry. |
- Desk
- Debt Capital Markets
- Sold to
- A small group of insurers and funds
- Public document
- None
- Covenants
- Financial, and tested — unlike a public bond
- Unusual feature
- Money can be drawn months after signing
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricematters
- Financingbarely applies
- Approvalbarely applies
- Diligencedecides it
- Executiondecides it
What decides it here. There is no book to hide in: every investor makes its own credit decision and can simply decline, so the diligence conversation is the transaction. What is then negotiated is a covenant package closer to a loan than to a bond, and it binds for the whole life.
3 · IntermediateHow it runs in practice
Who lends
Overwhelmingly life insurers and pension funds. They have long liabilities to match and no need for liquidity, which makes them uniquely suited to a ten- or fifteen-year note that will never trade. That is the structural reason this market exists: it pairs a borrower that cannot access public markets with a lender that does not want a public market.
The delayed draw
A feature that has no equivalent in the public bond market. A borrower can sign today at today's rate and take the money in six months, when it actually needs it for an acquisition or a capital project. In a public issue the money arrives on settlement or not at all.
That is genuinely valuable, and it is priced — the investor is holding a commitment for months, and charges for it.
Covenants, and the make-whole
- Financial covenants — leverage and interest cover, tested regularly. Breach them and the investors have rights they otherwise would not.
- A make-whole on early repayment — the borrower must compensate the investor for the interest it will no longer receive. Prepaying is therefore expensive by design, because the lender bought a stream and not an option.
- Pari passu and negative pledge — undertakings that later lenders will not be given a better position.
The regional variants
The same idea appears in different legal clothing across markets — a note purchase agreement with a group of institutions in one, a bilateral loan-style instrument documented in a few pages in another. What they share is the shape: unlisted, unrated, held to maturity, negotiated rather than announced.
4 · AdvancedThe numbers & the documents
Why the absence of a rating changes the analysis
A public bond is bought largely on the rating, and the rating is what makes hundreds of investors able to act on the same information. Without one, each investor must do the credit work itself. Three consequences:
- The process is slower, because credit committees are involved rather than trading desks.
- The pricing reflects the investor's own view rather than a market clearing level, so it is less volatile and less transparent.
- An investor that declines simply declines; there is no book to be scaled back into.
What the borrower is really paying for
Not just money. Certainty of terms for a long period, from lenders who will still be there in ten years and who can be talked to if something goes wrong. A borrower with a covenant problem in this market negotiates with five identifiable institutions; the same borrower in the public market negotiates with a bondholder group it has to go and find.
That relationship is worth a spread, and it is the honest answer to why a company would accept quarterly financial tests in a bond.
Liquidity, and the absence of it
These notes rarely trade. For the investor that is not a defect — a life insurer matching a fifteen-year liability has no intention of selling — but it means there is no mark from the market, and valuation is a model exercise. It also means that if an investor does need to exit, it is negotiating with a small number of possible buyers rather than hitting a bid.
Where this sits between the two halves of the site
It is the clearest case on this desk of an instrument that never becomes a traded security. A public bond becomes an instrument on the markets side the moment it settles; this one never does. It stays a contract between named parties, which is exactly the definition this site uses to separate deals from markets — and it is the one transaction that stays on this side for its whole life.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Private placement in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.